It has been about a month since the last earnings report for McDermott (MDR). Shares have added about 7.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is McDermott due for a pullback? 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 on Q3 Earnings & Sales Estimates
Mcdermott recorded third-quarter 2018 earnings of 20 cents per share, lagging the Zacks Consensus Estimate of 29 cents. The weaker-than-expected earnings can be attributed to higher tax expenses, amortization costs, along with transactional and integrational spending associated with the buyout of Chicago Bridge and Iron.
Moreover, the bottom line also deteriorated sharply from the prior-year earnings of $1.00 per share. Post the weak performance in the third quarter along with softer guidance for the remainder of 2018, shares of this Zacks Rank #5 (Strong Sell) company dipped 40% to close the session at $7.73 on Oct 31.
Notably, it recorded $744 million of charges on three of its major liquefied natural gas projects versus previous estimation of $221 million. The massive discrepancy in cost estimates reflects badly on management's due diligence. Precisely, the hefty charges include $482 million on Cameron LNG, $194 million on Freeport LNG and $68 million on the Calpine gas power project.
Further, McDermott missed revenue estimates in the quarter under review. The company generated revenues of $2,289 million in the quarter, lagging the Zacks Consensus Estimate of $2,504 million. Nonetheless, the top line witnessed year-over-year growth of 138%.
Costs and Expenses
Cost of operations increased from $774 million in the year-ago quarter to about $2,016 million in the quarter under review. While expenses in research and development increased to $8 million in the third quarter of 2018 from $2 million in the year-ago period, that of selling, general and administrative rose to $64 million from the prior-year quarter's $55 million. All these, combined with restructuring and integration costs, transaction expenses and other intangibles amortization, resulted in a total expense of $2,150 million compared with the year-ago figure of $831 million.
The Revenue Pipeline of the company includes Backlog, Bids & Change Orders Outstanding and Target Projects. As of Sep 30, McDermott had a backlog of $11.5 billion compared with $3.4 billion a year ago. It had $20.7 billion in Bids & Change Orders Outstanding and $80.3 billion in Revenue Pipeline at the end of the third quarter compared with $25 billion in the year-ago quarter. Revenue opportunity pipeline of $80.3 billion was mainly driven by North, Central & South America, as well as Middle East & North Africa segments.
Balance Sheet and Capital Expenditure
Capital expenditure of McDermott was about $19 million during the quarter compared with almost $16 million in the year-ago quarter. The company generated a negative free cash flow (FCF) of $240 million. As of Sep 30, 2018, it had cash and cash equivalents of $580 million, and long-term debt of approximately $3,397 million. Its debt-to-capitalization ratio was about 48.9%.
Second-Half 2018 View Trimmed
The company updated its guidance for the second half of the year. McDermott expects revenues in the $4.8-$5.1 billion range, unchanged from the prior guidance. However, it revised its EBITDA guidance from prior expectation of $350-$390 million to $375-$415 million. Capital expenditure is now anticipated to be around $60 million compared with the prior guidance of $80 million. However, adjusted net income is now anticipated in the band of $150-$160 million compared with the previous guidance range of $200-$210 million. Also, McDermott now expects its negative FCF between $580 million and $600 million versus prior guidance of $430-$450 million. Adjusted EPS is now estimated between 31 cents and 36 cents, down from the prior guidance of 74-80 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 -56.7% due to these changes.
At this time, McDermott has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise McDermott has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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