On Nov 8, 2013, we upgraded our recommendation on MRC Global Inc. (MRC) to Neutral from Underperform, based on the company’s recent expansion initiatives.
Why the Upgrade?
MRC Global has been growing inorganically over the past few quarters. The company acquired Flow Control Products in July 2013, to expand operations in the Permian Basin, a major oil-producing region in the U.S. Acquisitions of Chaparral Supply, LLC and Production Specialty Services Inc. were completed in Jun 2012 and Dec 2012, respectively. The acquired businesses contributed roughly $43.0 million to revenues in the third quarter 2013.
In the coming quarters, MRC Global plans to spend on further acquisitions to gain a stronger foothold in the industry.
Strategic contract wins have helped increase the company’s market share in the past quarters. Till date, in 2013, MRC Global received many contracts in all the markets, including upstream, midstream and downstream. Improved North American upstream market supported a 3.6% sequential improvement of revenues in the third quarter of 2013. Based on the stabilizing market, MRC Global has revised upwards the lower end of expected revenues for 2013 to $5.16 billion from $5.10 billion.
However, the company’s over-dependence on a handful of customers raises our concern. Unfavorable spending pattern by the top 25 customers in the second-quarter 2013 had a significant impact on revenues. Also, its overseas operations expose the company to various risks including negative foreign currency exchange effects and geopolitical uncertainties.
Other Stocks to Consider
MRC Global currently carries a Zacks Rank #3 (Hold). Other stocks in the industry worth considering include Mueller Water Products, Inc. (MWA), Flowserve Corp. (FLS) and Graham Corp. (GHM). All these carry a Zacks Rank #2 (Buy).
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