Zacks_Analysts' Blog : McDermott Beats Revenue, Not EPS - Analyst Blog

Energy-focused engineering and construction company McDermott International (MDR) has reported mixed third quarter 2011 performance based on improved sales and steeper operating costs.

The company reported earnings per share from continuing operations of 4 cents in the quarter, lagging the Zacks Consensus Estimate of 13 cents and plunging 84.6% from 26 cents earned in the prior-year quarter. The underperformance can be attributed to weaker marine operations in the Middle East business unit.

McDermott generated revenues of $879.9 million in the quarter, up an impressive 20.2% from third quarter 2010 and slightly ahead of our expectation of $873.0 million. The quarterly performance was buoyed by strong contributions from the Asia-Pacific belt (attributable to increased marine activity on large engineering, procurement, construction and installation or EPCI projects), partially offset by weak activity in the Middle East region.

During the quarter, the company’s operating income fell 58.2% year over year to $35.2 million, adversely affected by higher operating expenses.

Backlog

At the end of the quarter, McDermott had a backlog of $4.3 billion, compared with $3.6 billion in the prior year. As of June 30, 2011, backlog was $4.7 billion.

Balance Sheet

As of September 30, 2011, the company had $403.6 million cash on hand and long-term debt (including current maturities) of $89.1 million, representing a debt-to-capitalization ratio of 4.9%.

Our Recommendation

Houston, Texas-based McDermott International operates as a global engineering, procurement, construction, and installation company that focuses on designing and executing complex offshore oil and gas projects. The company has access to most major offshore oil and gas producing regions, including the U.S., Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

We believe that the company’s performance is highly susceptible to the volatile and cyclical oil and gas sector. A potential drop in oil and gas prices could curtail deepwater drilling and dampen subsea equipment demand, adversely affecting bookings.

Additionally, following The Babcock & Wilcox Company (BWC) spin-off, McDermott is now less diversified with a greater business risk profile. The company also faces stiff competition from peers such as Chicago Bridge & Iron Company N.V. (CBI) and Foster Wheeler AG (FWLT).

Hence, we see little reason for investors to own the stock and maintain our long-term Underperform recommendation. McDermott currently retains a Zacks #5 Rank (short-term Strong Sell rating).