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On Oct 1, 2013, we initiated our coverage on MRC Global Inc. (MRC - Analyst Report) with an Underperform recommendation. The company is one of the leading distributors of pipes, valves and fittings (PVF) and related products and services to the energy industry.

Why Underperform?

MRC Global provides products that are used across upstream, midstream as well as downstream sectors of the oil and gas industry. Considering the recent decline in the spending levels in the upstream sector and the transmission segment of the downstream business accompanied by a planned decline in the oil country tubular goods (OCTG) product line, we do not see a significant improvement in results in the coming quarters.

MRC Global reported second-quarter 2013 revenues declining 11.4% year over year to $1.3 billion. The company’s overseas operations expose it to various risks including foreign currency exchange and geo-political risks. In the second quarter of 2013, earnings dropped to the extent of 9 cents per share due to the negative impact of foreign currency exchange transactions.

Additionally, MRC Global’s overdependence on a handful of customers also has its risks. In the second quarter of 2013, six out of the top 25 customers reduced their spending by $100 million or 39% year over year, which negatively impacted MRC Global’s revenues.

Following the results, MRC Global significantly reduced its earnings per share expectations in 2013 to a range of $1.65 to $1.85 from the previous range of $2.10 to $2.35. Moreover, revenue expectations have been reduced to a range of $5.1 billion to $5.3 billion, from the initial range of $5.75 billion to $6.05 billion.

The Zacks Consensus Estimate for 2013 dropped 12.6% in the last 90 days to $1.74 per share and for 2014 the estimate declined 17.4% to $2.04 per share during the same time frame.

Other Stocks to Consider

MRC Global currently carries a Zacks Rank #4 (Sell). Other stocks worth a watch in the industry include Mueller Water Products, Inc. (MWA - Snapshot Report), The Middleby Corporation (MIDD - Analyst Report) and Xylem Inc. (XYL - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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