Calculated Expansion And Operational Efficiency Set To Propel Growth Amidst Market Challenges

Key Takeaways

• Expansion into ExxonMobil's operations and focus on cash generation signify potential for increased revenue, margins, and strong financial health.
  
• High demand for natural gas and solid international market performance indicate opportunities for revenue growth and improved earnings.
  
• Delays in key sectors and lowered customer spending may hinder near to medium-term revenue growth, despite strong international revenue.

Catalysts

Through its subsidiaries, distributes pipes, valves, fittings, and other infrastructure products and services in the United States, Canada, and internationally.

• Expansion into ExxonMobil's North American operations as a primary strategic supplier of PVF products and services suggests an anticipated increase in revenue and potentially higher margins due to scale and value-added services.
  
• The focus on cash generation, with a target of $200 million or more in operating cash flow for the year, indicates strong financial health and operation efficiency, likely to positively impact net margins.
  
• Reduction in SG&A expenses and emphasis on maintaining a lean cost structure suggest improved operational efficiency, which could lead to margin expansion.
  
• High demand growth for natural gas, supported by exports and increased utility and industrial use, presents revenue growth opportunities across MRC Global's sectors due to the need for more infrastructure.
  
• The solid performance and growth potential in the international market, particularly with a 32% increase in backlog indicating strong future revenue streams, suggest improved overall earnings.

Assumptions

• Analysts are assuming MRC Global's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 3.1% in 3 years time.
• Analysts expect earnings to reach $111.0 million (and earnings per share of $1.17) by about October 2027, up from $81.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $127 million in earnings, and the most bearish expecting $88.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2027 earnings, up from 12.8x today. This future PE is greater than the current PE for the US Trade Distributors industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 3.69% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

Risks

• There's continued destocking by some Gas Utilities customers, indicating revenue from this sector might not fully recover until after 2024, potentially affecting near-term revenue growth.
  
• Delays in DIET sector projects and refinery turnarounds into 2025 are expected, which can lead to decreased revenue and profits in the short term as immediate cash inflows from these projects are postponed.
  
• Softened customer spending expectations in the U.S. for the PTI sector, attributed to lower rig counts and E&P customer integrations, could impact revenue, particularly if these conditions extend beyond the current forecast period.
  
• While international revenue shows strong growth, reliance on this can pose risks if global economic conditions change or specific projects encounter delays or cancellations, impacting overall revenue and earnings.
  
• The potential for a temporary pullback in Gas Utilities project activity for the remainder of the year, alongside PTI activity impacts due to lower rig counts, could lead to lower than anticipated revenue and net income in the short to medium term.

Valuation

• The analysts have a consensus price target of $16.0 for MRC Global based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $111.0 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 7.5%.
• Given the current share price of $12.19, the analyst's price target of $16.0 is 23.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.