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McDermott Downgraded to Strong Sell

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Zacks Investment Research downgraded engineering and construction firm McDermott International (MDR - Free Report) to a Zacks Rank #5 (Strong Sell) on Apr 13.

Why the Downgrade?

McDermott derives its revenues from companies in the oil and gas exploration and production (E&P) 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.

In particular, McDermott has hinted towards revenue of $3 billion in 2013, lower than the 2012 figure of $3.6 billion, mainly due to uncertainty around the timing of some the company’s bigger awards.

Additionally, McDermott expects the large Papa Terra project in Brazil to contribute to its earnings only in late 2013 or early 2014 against the previous assumption of an earlier timeframe.

We believe that the transfer of power generation and government operations (post-split) has left McDermott with a less diversified business, thereby heightening its risk profile.

A combination of all these factors has lowered earnings estimates for McDermott in the last 60 days. The Zacks Consensus Estimates have decreased by 20.0% to 16 cents per share for the first quarter of 2013 and 16.85% to 74 cents per share for 2013.

Other Stocks to Consider

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

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