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McDermott (MDR) Down 3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for McDermott (MDR - Free Report) . Shares have lost about 3% 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 drivers.

Second Quarter 2018 Results

McDermott recently reported earnings of 29 cents per share in second-quarter 2018, surpassing the Zacks Consensus Estimate of 15 cents. The better-than-expected earnings can be primarily attributed to solid operational execution. However, the bottom line fell from the year-ago quarter’s earnings of 38 cents due to increased costs and expenses.

McDermott generated revenues of $1.7 billion in the quarter, which were nearly 120% higher than the prior-year figure of $789 million and also surpassed the Zacks Consensus Estimate of $1.6 billion. The rise in revenues was supported by Cameron and Freeport LNG projects, ethylene production project LACC, Saudi Aramco Safaniya 5 and Woodside Greater Western Flank II.

The results incorporate the effects of its strategic combination with CB&I that occurred on May 10.

Costs and Expenses

Cost of operations increased from $650 million in the year-ago quarter to about $1.5 billion in the quarter under review. While expenses in research and development increased to $5 million in the second quarter of 2018 from $1 million in the year-ago period; that of selling, general and administrative rose to $75 million from the prior-year quarter’s $50 million. All these, combined with restructuring and integration costs, transaction expenses and other intangibles amortization resulted in a total expense of $1.7 billion from the year-ago figure of $701 million.

Revenue Pipeline

The Revenue Pipeline of the company includes Backlog, Bids & Change Orders Outstanding and Target Projects. As of Jun 30, McDermott had a backlog of $10.2 billion compared with $3.3 billion a year ago. It had $19 billion in Bids & Change Orders Outstanding and $78.5 billion in Revenue Pipeline at the end of the second quarter compared with $20.1 billion in the year-ago quarter.

Balance Sheet and Capital Expenditure

Capital expenditure of McDermott was about $24 million during the quarter compared with almost $18 million in the year-ago quarter.  In the quarter, the company generated $374 million in free cash flow. As of Jun 30, 2018, the company had cash and cash equivalents of $814 million and long-term debt of approximately $3.4 billion. Its debt-to-capitalization ratio was about 51.5%. The company also has $879 million under a revolving credit facility. The company’s balance sheet reflects the acquisition of CB&I.

Second-Half 2018 Guidance

The company provided guidance for the second half of the year. McDermott expects revenues in the $4.8-$5.1 billion range. The company expects EBITDA in the range of $350-$390 million. Capital expenditure is anticipated to be around $80 million. Adjusted net income is now anticipated to be approximately within $200-$210 million. Also, McDermott expects free cash flow within $430-$450 million. EPS is estimated between 74 cents and 80 cents.

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 -21.62% due to these changes.

VGM Scores

Currently, McDermott has an average Growth Score of C, though it is lagging a bit on the Momentum Score 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 B. 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

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McDermott has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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