Given its erratic earnings trend over the last few quarters
and a disappointing outlook for 2013, we have downgraded the
shares of energy-focused engineering and construction firm
) to Underperform from Neutral.
Incorporated in 1959, McDermott primarily serves the worldwide
offshore oil and gas field development activities, including
front-end design and detailed engineering, fabrication and
installation of offshore drilling and production facilities, as
well as installation of marine pipelines and subsea production
Additionally, the company provides project management and
procurement services. It operates in most major offshore oil and
gas producing regions, including the U.S., Mexico, Canada, the
Middle East, India, the Caspian Sea and Asia Pacific.
In August 2010, McDermott completed the spin-off of its 'Power
Generation Systems' and 'Government Operations' segments into a
separate, independent and publicly traded entity
The Babcock & Wilcox Company
Though the energy-focused engineering and construction firm
managed to beat revenue estimates in the most recent quarter, it
had to deal with steeper operating costs. McDermott has already
hinted that its top line will suffer next year due to uncertainty
regarding the timing of big awards.
Near-term bookings also remain lumpy, as the current uncertain
environment has hurt the economics of building new oil and gas
Moreover, we believe that the transfer of the power generation
and government operations (post-split) has left McDermott with a
less diversified business. As a result, the business risk profile
of the reorganized McDermott is weaker than its earlier form.
Given these concerns, we expect McDermott to perform below its
peers and industry levels in the coming months. As such, we see
little reason for investors to own the stock. Our new long-term
Underperform recommendation is supported by a Zacks #5 Rank
(short-term Strong Sell rating).
Partially offsetting these negatives are the company's solid
margins, clean execution skills and expectations for accelerated
activity levels next year.
BABCOCK&WILCOX (BWC): Free Stock Analysis
MCDERMOTT INTL (MDR): Free Stock Analysis
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