McDermott (MDR) Down 17.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the las t earnings report for McDermott (MDR). Shares have lost about 17.5% 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 the most recen t earnings report in order to get a better handle on the important catalysts.

McDermott Lags on Q4 Earnings & Sales Estimates

Mcdermott recorded fourth-quarter 2018 loss of $1.55 per share, significantly lagging the Zacks Consensus Estimate o f earnings of 21 cents. Moreover, the bottom line deteriorated sharply from the prior-year earnings of 32 cents per share.

The weak earnings report can be attributed to surging operating costs. The company's bottom line was affected by the incurrence of an additional $253 million of cost overruns in the reported quarter, related to rising expenses of Cameron LNG, Calpine and Abkatun-A2 offshore projects.

Operating loss in the reported quarter was $2,499 million against the prior-year operating profit of $45 million.

Further, McDermott missed revenue estimates in the quarter under review. The company generated revenues of $2,073 million in the quarter, lagging the Zacks Consensus Estimate of $2,700 million. Nonetheless, the top line witnessed year-over-year growth of 188.7%.

Upbeat 2019 Guidance

McDermott announced detailed guidance for 2019. The company expects revenues in the $9.5-$10.5 billion range compared with the corresponding Zacks Consensus Estimate of $9.7 billion. This reflects a significant improvement from 2018 revenues of $6.7 billion.

Operating income in full-year 2019 is expected in the range of $725-$775 million. Moreover, full-year adjusted earnings per share are expected in the range of $1.65-$1.75 compared with the Zacks Consensus Estimate of $1.51. This also reflects a huge jump from 2018 loss per share of 99 cents. This upbeat guidance more than offset the negative effects of fourth-quarter earnings. As a result, the stock price jumped around 7.6% on Feb 26.

For 2019, the company expects capital expenditure to be around $165 million. Negative free cash flow is expected in the range of $265-$215 million. At the end of 2019, cash and cash equivalents are anticipated to be within $510-$560 million and gross debt is expected to be around $3,530 million.

While the company anticipates soft performance in the first quarter, operating performance is expected to be stronger in the second half than first-half 2019.

Costs and Expenses

Cost of operations increased from $597 million in the year-ago period to about $2,197 million in the quarter under review. While expenses in research and development increased to $7 million in fourth-quarter 2018 from $2 million in the year-ago period; that of selling, general and administrative rose to $94 million from the prior-year quarter's $62 million.

All these, combined with restructuring and integration costs, transaction expenses and other intangibles amortization, resulted in a total expense of $4,584 million compared with the year-ago figure of $671 million.

Revenue Pipeline

As of Dec 31, McDermott had a backlog of $10.9 billion compared with $3.9 billion in the corresponding period of 2017. It had $20.3 billion in Bids & Change Orders Outstanding and $93.1 billion in Revenue Pipeline at the end of the fourth quarter compared with $24.5 billion in the comparable year-ago period. Revenue opportunity pipeline of $93.1 billion was mainly driven by North, Central & South America, as well as Middle East & North Africa segments.

Capital Expenditure, FCF & Balance Sheet

Capital expenditure of McDermott was about $24 million during the quarter compared with $22 million in the year-ago period.

The company generated a negative free cash flow (FCF) of $309 million in fourth-quarter 2018.

As of Dec 31, 2018, it had cash and cash equivalents of $520 million, and a long-term debt of approximately $3,393 million. Its debt-to-capitalization ratio was about 80.5%.

How Have Estimates Been Moving Since Then?

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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