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Zacks Investment Research downgraded engineering and construction firm McDermott International (MDR - Analyst Report) to a Zacks Rank #4 (Sell) on May 14.

Why the Downgrade?

On May 8, McDermott reported weak first-quarter 2013 profits, owing to operating losses in some regions and increased expenses. Earnings per share from continuing operations came in at 9 cents, lagging the Zacks Consensus Estimate of 15 cents.

Moreover, the Texas-based engineering-to-project management service provider’s per share profit was significantly lower than 25 cents earned in the first quarter of 2012. The quarter’s results were negatively influenced by lesser asset utilization and project activity.

In fact, McDermott delivered negative earnings surprises in 2 of the last 4 quarters with an average miss of 13.15%.

McDermott derives its revenues from companies in the oil and gas exploration and production industry, a highly volatile and cyclical sector that is directly exposed to commodity prices. A potential drop in oil and gas prices could curtail deepwater drilling and dampen subsea equipment demand, adversely affecting bookings at McDermott.

Additionally, McDermott has historically used bolt-on acquisitions to plug holes in its product/service portfolio. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.

Other Stocks to Consider

Not all engineering firms in the energy sector are performing as poorly as McDermott. The stocks of PowerSecure International Inc. (POWR - Snapshot Report) and Matrix Service Company (MTRX - Snapshot Report) with Zacks Rank #2 (Buy) and Natural Gas Services Group Inc. (NGS - Snapshot Report) with Zacks Rank #1 (Strong Buy) are worth considering.
 

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