McDermott Beats Revenue, Not EPS - Analyst Blog
09 November 2011 - 7:15PM
Zacks
Energy-focused engineering and
construction company McDermott International (MDR)
has reported mixed third quarter 2011 performance based on improved
sales and steeper operating costs.
The company reported earnings per
share from continuing operations of 4 cents in the quarter, lagging
the Zacks Consensus Estimate of 13 cents and plunging 84.6% from 26
cents earned in the prior-year quarter. The underperformance can be
attributed to weaker marine operations in the Middle East business
unit.
McDermott generated revenues of
$879.9 million in the quarter, up an impressive 20.2% from third
quarter 2010 and slightly ahead of our expectation of $873.0
million. The quarterly performance was buoyed by strong
contributions from the Asia-Pacific belt (attributable to increased
marine activity on large engineering, procurement, construction and
installation or EPCI projects), partially offset by weak activity
in the Middle East region.
During the quarter, the company’s
operating income fell 58.2% year over year to $35.2 million,
adversely affected by higher operating expenses.
Backlog
At the end of the quarter,
McDermott had a backlog of $4.3 billion, compared with $3.6 billion
in the prior year. As of June 30, 2011, backlog was $4.7
billion.
Balance Sheet
As of September 30, 2011, the
company had $403.6 million cash on hand and long-term debt
(including current maturities) of $89.1 million, representing a
debt-to-capitalization ratio of 4.9%.
Our
Recommendation
Houston, Texas-based McDermott
International operates as a global engineering, procurement,
construction, and installation company that focuses on designing
and executing complex offshore oil and gas projects. The company
has access to most major offshore oil and gas producing regions,
including the U.S., Mexico, Canada, the Middle East, India, the
Caspian Sea and Asia Pacific.
We believe that the company’s
performance is highly susceptible to the volatile and cyclical oil
and gas sector. A potential drop in oil and gas prices could
curtail deepwater drilling and dampen subsea equipment demand,
adversely affecting bookings.
Additionally, following The
Babcock & Wilcox Company (BWC) spin-off, McDermott is
now less diversified with a greater business risk profile. The
company also faces stiff competition from peers such as
Chicago Bridge & Iron Company N.V. (CBI) and
Foster Wheeler AG (FWLT).
Hence, we see little reason for
investors to own the stock and maintain our long-term Underperform
recommendation. McDermott currently retains a Zacks #5 Rank
(short-term Strong Sell rating).
BABCOCK&WILCOX (BWC): Free Stock Analysis Report
CHICAGO BRIDGE (CBI): Free Stock Analysis Report
FOSTER WHELR AG (FWLT): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
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