Why Is MRC (MRC) Down 6.7% Since Last Earnings Report?

It has been about a month since the last earnings report for MRC Global (MRC). Shares have lost about 6.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is MRC due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

MRC Global Tops Q1 Earnings Estimates, Lowers View

MRC Global reported better-than-expected results for the first quarter of 2019. Its earnings and sales beat estimates by 22.2% and 1.7%, respectively. This has come after it reported weak results in the past two consecutive quarters.

The company's adjusted earnings in the reported quarter were 14 cents per share, surpassing the Zacks Consensus Estimate of 6 cents. However, the bottom line decreased 22.2% from the year-ago figure of 18 cents. The year-over-year results were adversely impacted by the weak midstream business.

Weak Segmental Businesses Impact Revenues

In the reported quarter, MRC Global's revenues totaled $970 million, reflecting a year-over-year decline of 4%. Results were adversely impacted by weak segmental results.

However, the top line surpassed the Zacks Consensus Estimate of $954 million.

Based on the company's product line, revenues from carbon steel pipe, fittings and flanges decreased 6.7% year over year to $307 million while that from valves, automation, measurement and instrumentation increased 1.3% to $383 million, and that from gas products improved 7.3% to $133 million. Sales for general oilfield products decreased 23% to $97 million and that for stainless steel, and alloy pipe and fittings fell 5.7% to $50 million.

Revenues from the Upstream sector were approximately $312 million, increasing 3.3% from the year-ago quarter. Midstream sales totaled $361 million, roughly 12% below the year-ago quarter while Downstream sales totaled $297 million, decreasing 0.3% year over year.

The company has three reportable segments — the U.S., Canada and International. Information on these segments for the quarter under review is given below:

Sales generated from the U.S. segment totaled $779 million, decreasing 3.3% year over year. The results were adversely impacted by the midstream business, partially offset by strength in upstream and downstream businesses.

Revenues from the Canada segment decreased 12.8% year over year to $68 million due to weakness in upstream and downstream businesses. However, results in the midstream business improved year over year.

Sales from the International segment decreased 2.4% to $123 million. The results were adversely impacted by weakness in upstream and downstream businesses, partially offset by strength in midstream.

Gross Margin Improves Y/Y

In the quarter under review, MRC Global's cost of sales decreased 5.4% year over year to $796 million. Adjusted gross profit in the quarter decreased 1.6% year over year to $190 million. Margin expanded 50 basis points (bps) to 19.6%. Selling, general and administrative (SG&A) expenses were up 0.7% year over year to $139 million.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased 5.1% year over year to $56 million while adjusted EBITDA margin was roughly flat at 5.1%. Interest expenses increased 37.5% year over year to $11 million.
 
Balance Sheet and Cash Flow

Exiting first-quarter 2019, MRC Global had a cash balance of $27 million, down 37.2% from $43 million at the end of the last reported quarter. Long-term debt balance increased 9.1% sequentially to $742 million.

In the quarter, the company used net cash of $40 million for operating activities versus $74 million used in the year-ago quarter. Capital spending totaled $2 million versus $5 million in the year-ago quarter.

During the quarter, the company used $25 million for repurchasing shares and $6 million for paying dividends.

Exiting the quarter, it had approximately $25 million left under its $150-million share buyback program authorized in October 2018. This program will expire by 2019 end.

Outlook

For 2019, MRC Global predicts revenues of $4,070-4,270 million, down from previously stated $4,070-$4,470 million. The revision accounts for decelerating growth in customer activity in the second quarter. Revenues in the second quarter are predicted to grow 6-9%.

Adjusted gross profit margin has been maintained at 19.7-19.9%. Selling, general and administrative expenses will likely be $555-$575 million and adjusted EBITDA will be $260-$290 million, down from $275-$315 million stated previously. Tax rate will be roughly 25%.

Cash flow from operations will likely be $150-$200 million and capital spending will be $20-$25 million.

Earnings per share will be roughly between 70 cents and $1.00, down from the previously stated 80 cents to $1.10.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, MRC has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, MRC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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