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Here’s Why it is Worth Holding on to MRC Global (MRC) Now


We have issued an updated research report on MRC Global Inc. MRC on Jan 11.

This leading distributor of pipes, valves and fittings (PVF) to the energy industry currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $1.4 billion.

A few growth drivers and certain headwinds, which might influence MRC Global, have been discussed below.

Factors Favoring MRC Global

Diversified Business Operations: MRC Global operates through three reporting segments — U.S., Canada and International. The U.S. segment was the largest revenue contributor in the third quarter of 2018, accounting for the quarter’s 80.2% sales. Operations in various geographical locations have been a boon for the company over time.

It’s worth mentioning here that MRC Global serves a vast customer base in the energy and other markets. Prime industries served include exploration, production, and extraction of underground oil and natural gas; natural gas utilities; crude oil refining; petrochemical processing; and general.

In the quarters ahead, MRC Global anticipates gaining from increased oil & gas production in the United States, which has spurred demand for facility expansion and pipeline infrastructure. Also, ease of installing new pipelines, stability in natural gas (low-cost) supply and many other factors are favorable for MRC Global.

Contracts: MRC Global stands to gain from lucrative contract wins (multi-year) and projects. In this regard, work on ten major transmission projects to offset the productivity shortfall in the Permian basin will be a boon for the company. These activities are anticipated to generate $150-$200 million revenues in 2018-2020. In addition, contracts secured from Statoil in July 2017 and from Exxon Mobile in March 2017 are expected to boost the company’s top-line performances.

In the third quarter of 2018, the company’s U.S. segment gained from new contracts secured in the downstream sector.

Shareholder-Friendly Policies: MRC Global believes in rewarding its shareholders handsomely through share buybacks. In the first nine months of 2018, the company used $50 million for repurchasing roughly 2.87 million common shares. This spending was higher than $18 million used in the first nine months of 2017.

In October 2018, the company’s board of directors authorized a $150-million buyback program. This program expires in December 2019.

Factors Working Against MRC Global

Share Price Performances and Poor Valuation: Market sentiments have been against MRC Global for quite some time now. In the past six months, the company’s shares have declined 29.8%. This fall is lower than the industry’s decline of 33% but worse than the S&P 500’s decrease of 7.7%. In the third quarter of 2018, the company’s earnings of 20 cents per share lagged the Zacks Consensus Estimate by 13.04%. This was the third dismal performance by MRC Global in the past four quarters, which had an average negative earnings surprise of 31.17%.

The company’s stock appears overvalued compared with the industry. On a Price/Earnings (P/E) basis, the stock is currently trading at 31.6x, higher compared with the industry’s 16.9x. Further, the stock’s current valuation multiple is above the industry’s highest levels of 20.2x for the past six months.

Midstream Business: Weakness in midstream business had an adverse impact on MRC Global’s third-quarter top-line results. Revenues generated from the midstream business decreased roughly 3% year over year, due mainly to weakness in sales generated from gas utility as well as transmission and gathering customers. We believe that such weakness, if persists, can continue to hamper the company’s top-line performances.

For the fourth quarter of 2018, MRC Global expects revenues to decline 4-7% sequentially. Revenues are likely to be above $1 billion.

High LIFO Expenses, Lower Earnings Estimates: In the third quarter of 2018, MRC Global recorded 100% surge in its LIFO-related expenses. These $26-million expenses adversely impacted the company’s margins and profits in the quarter. For 2018, the company predicts LIFO-related expenses to total $64 million, higher than $50 million mentioned earlier.

In the past 60 days, the Zacks Consensus Estimate for earnings per share is pegged at $59 cents for 2018 (results not yet released) and $1.04 for 2019. The estimates reflect decline of 1.7% for 2018 and 4.6% for 2019 from the respective tallies 60-days ago.

MRC Global Inc. Price and Consensus

MRC Global Inc. Price and Consensus | MRC Global Inc. Quote

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Barnes Group, Inc. B and Colfax Corporation CFX. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), both Barnes and Colfax carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for these three companies for 2019 have improved over the past 60 days. Further, positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 7.04% for Barnes and 8.88% for Colfax.

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