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Why Is McDermott (MDR) Down 15% Since the Last Earnings Report?

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It has been about a month since the last earnings report for McDermott International, Inc. (MDR - Free Report) . Shares have lost about 15% in that time frame, underperforming the market.

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

McDermott Lags Q2 Earnings and Revenue, Stock Falls

Offshore oil and gas-focused engineering and construction firm McDermott reported earnings of $0.13 per share in second-quarter 2017, lower than the Zacks Consensus Estimate of $0.16. The weaker-than-expected results are mainly attributed to increased costs. However, the bottom line improved from the year-ago quarter’s earnings of $0.08 on strong project execution and increased activity levels.

An earnings miss in this quarter broke the company's impressive track record of beating estimates in each of the last ten quarters.Concurrently, shares declined 3.95% to eventually close at $6.81 on Jul 25, reflecting investors’ disappointment.

McDermott generated revenues of about $788.7 million in the quarter, higher than $706.6 million in the prior-year quarter. Increased fabrication and marine activity levels on Saudi Aramco LTA II, ONGC Vashishta and Saudi Aramco Marjan power system replacement drove revenues. However, the top line was below the Zacks Consensus Estimate of $861 million. Lower revenues are mainly attributed to reduced activities on Ichthys LNG project as it is yet to become operational.

Total Expenses

Total costs and expenses increased about 8% from $649.6 million in the year-ago quarter to about $701.5 million. Higher cost of operations and research and development expenses led to increasing costs and expenses.

Backlog

At the end of the first quarter, McDermott had a backlog of $3.3 billion compared with $4.4 billion a year ago. While 85% of the total backlog is related to offshore operations with Saudi Aramco work accounting for about 67% of backlog, the remaining 15% pertains to subsea operations. Of the total backlog, approximately $1.7 billion is expected to cleared in 2017 and the remaining $1.6 billion in 2018.

Balance Sheet

Capital expenditure for McDermott was about $18 million during the quarter as compared with $139 million in the year-ago quarter. Capex in the quarter was mainly driven by upgrades to the pipelay and construction vessel Ceona Amazon acquired in the prior quarter along with reformation of the Altamira fabrication yard to accommodate larger and heavier structures.

As of Jun 30, 2017, the company had cash and cash equivalents of $393.7 million and long-term debt of approximately $526.7 million. The debt-to-capitalization ratio of the company is about 24.08%.

Updated 2017 Guidance

The company updated its prior guidance to reflect the impact of the closing of its amended and restated credit agreement and repayment of the term loan. The projected gross debt is now likely to total to $550 million at the end of 2017 as against the prior guidance of $770 million. Net debt is estimated to be approximately $235 million at the end of the year.

However, other projected numbers including revenues, income, capex, EPS and free cash flow remain as per the previous guided figures.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

VGM Scores

At this time, the stock has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.




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