On Monday, August 11 after-hours, McDermott (MDR) reported earnings of $0.77 per share on $1.79 billion in revenue. Analysts' average expectation was for EPS of $0.772 per share on $1.85 billion in revenue, meaning MDR's reported a slight miss. Shares dropped nearly 14%. Revenue did increase 26% from a year earlier, but that wasn’t enough.
Two areas of focus are the operating margins (12%, trailing 12-months) which are currently underperforming industry and sector peers, and EPS growth (11.5%, trailing 12-months). Both need to significantly improve for shares to see their highs ever again. Additionally, in the past 6 months, insiders have sold around 906,000 shares and made no purchases, another possible cause for concern.
Last Thursday, August 14, Citigroup Global Markets downgraded MDR from a “Buy” to a “Hold” and cut their price target to $42 from $77! Shares fell 8%. Two things wrong: 1) The target of $77 was never hit and doesn’t look like it will hit that, at a minimum of several months, and 2) $42 was hit 5 days before the report.
On the day of the report, MDR was trading below $36 and when the analyst report came out, the price dropped close to $35. A little too late? What’s interesting is that there have been a total of 10 “Buy” or “Hold“ sell-side ratings and no “Sell” ratings in the past 3 months. That should change in the coming months.
Also, KeyBanc Capital Markets noted that J. Ray McDermott, MDR’s offshore oil and gas construction unit, was a particular source of weakness. This may be the reason why MDR named a new COO to take over global operations. This analyst, along with other optimists, has kept a “Buy” rating and a $70 price target, which is completely different from the analyst at Citigroup. This should tell you not to rely on analyst recommendations for MDR - things are already confusing enough without them.
That wasn’t the only change in management. Last Friday, MDR announced that they named a new CEO to succeed the current CEO & Chairman Bruce Wilkinson on Oct. 1, who will retire on Sept. 30. The man is 63 years old, so I believe that, but MDR’s shares have fallen over 40% this year. That “may” have had a tiny influence.
Technically, MDR is in a terribly bearish position, and it’s a perfect short candidate for the intermediate term. For the short-term, I expect MDR to drop further but anticipate a pullback from extremely oversold levels into the $38 resistance area soon. The volume on the day after earnings hit a capitulatory 14.3 million shares traded. Keep in mind that the average daily volume is 2.8 million. For the long-term, the trend is broken and MDR is in a primary leg down, having broken through numerous support levels. The next major support level is at around $26, as can be seen below.
(Click on chart to enlarge)
Warning Signs to Sell (Opportunity Signs to Short)
- Stalling at the 50-day MA
- Break in the 50-day MA
-Break in the 200-day MA
- 4 weak rallies forming flags
(Click on chart to enlarge)
Full Disclosure: No position in MDR
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