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McDermott (MDR) Down 28.4% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for McDermott . Shares have lost about 28.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is McDermott 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 catalysts.

McDermott Posts Lacklustre Q2 Results

Mcdermott reported adjusted loss per share of 7 cents, in stark contrast with the Zacks Consensus Estimate of earnings of 8 cents. The bottom line also compared much unfavorably with the year-ago earnings of 29 cents.   

The weaker-than-expected earnings reflect the impact of higher costs. In particular, quarterly expenses surged to $1,949 million from the year-ago figure of $1,486 million.

Revenues of $2,137 million also lagged the Zacks Consensus Estimate of $2,271 million. Nonetheless, the top line grew 23.2% from the year-ago quarter.

Revenue Pipeline

McDermott boasts a ‘Revenue Opportunity Pipeline’ of around $90.2 billion, which includes Backlog, Bids & Change Orders Outstanding, and Target Projects, according to the company. As of Jun 30, it had a backlog of $20.5 billion, outpacing the Zacks Consensus Estimate of $17.1 billion. The backlog reflects 33.1% and 100.9% increase on a sequential and year-over-year basis, respectively.

The company had $15.6 billion in Bids & Change Orders Outstanding and $54.1 billion in Target Projects. Its revenue pipeline is primarily driven by North, Central & South America (‘NCSA’), Europe, Africa, Russia & Caspian (“EARC”) as well as Middle East & North Africa (‘MENA’) segments, given continued momentum in offshore/subsea, downstream and LNG markets.

Capital Expenditure & Balance Sheet

During the quarter, McDermott spent approximately $15 million on capital programs, lower than the year-ago figure of $24 million. As of Jun 30, the company had $455 million in cash and $568 million available under the revolving credit facility. Long-term debt totaled $3,388 million, representing a leverage ratio of 86.3%.

Guidance

Following the weaker-than-expected results in the second quarter, McDermott trimmed its full-year guidance for 2019, taking into account reduced revenues, higher costs, scheduling issues, and a shift in the expected timing of incentives on the Cameron project from the fourth quarter of 2019 to 2020.

As such, revenues are now forecasted to total $9.5 billion versus the previous forecast of $10 billion. Estimates for adjusted operating income are reduced from $800 million to $470 million. As such, guidance for EBITDA, net income and EPS has also been cut. McDermott expects 2019 negative free cash flow to be about $640 million, wider than the prior forecast of $470 million. The company now expects full-year adjusted loss of 32 cents a share

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -133.65% due to these changes.

VGM Scores

Currently, McDermott has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 this revision indicates a downward shift. Notably, McDermott has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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