Gas Utility Sector Recovery And International Growth Will Strengthen Future Prospects

Key Takeaways

• Simplified capital structure and deleveraging efforts aim to enhance cash flow, investor confidence, and shareholder value, with positive impacts on earnings.
  
• Strong international growth and gas utility sector stabilization support revenue improvement and margin enhancement, benefiting overall financial performance.
  
• Slowed U.S. oilfield activity and project delays, along with reduced margins, challenge MRC Global's revenue growth and profitability amidst global oil supply-demand imbalances.

Catalysts

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

• MRC Global recently simplified its capital structure by replacing convertible preferred shares with a new seven-year $350 million Term Loan. This action is expected to be accretive to cash flow and earnings starting in 2025 due to lower after-tax interest expenses compared to the previous non-deductible dividends, potentially improving net margins and earnings.
  
• The company's international business is showing strong growth, with 21% year-over-year revenue growth in Q3 and a 22% higher backlog compared to the previous year. This positions the company for double-digit revenue improvement in future years, positively impacting overall revenue growth.
  
• MRC Global is targeting a 1 to 1.5x leverage ratio under normal conditions, which suggests a focus on further deleveraging in 2025. This prudent financial management could lead to improved investor confidence and potentially enhance shareholder value, impacting net earnings positively.
  
• The gas utility sector is witnessing stabilization and sequential growth, with anticipated recovery in 2025, supported by expected industry capital expenditure growth of 4% to 6% annually over the next five years. This sector's rebound could positively influence revenue and margins.
  
• The company’s strategy to enhance operational efficiency and optimize its cost structure is intended to maintain or even reduce SG&A costs, potentially leading to improved EBITDA margins in 2025 if revenue trends upward, benefiting earnings overall.

MRC Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MRC Global's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $109.3 million (and earnings per share of $1.27) by about December 2027, up from $75.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $90.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, up from 15.0x today. This future PE is lower than the current PE for the US Trade Distributors industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

MRC Global Future Earnings Per Share Growth

Risks

• The company's PTI sector is experiencing slower U.S. oilfield activity due to lower oil and natural gas prices and industry consolidation, which could negatively impact revenue growth.
  
• The company has faced project delays in the U.S. DIET sector and LNG-related activities due to permitting issues, potentially affecting its revenue and earnings in the short term.
  
• A 4% decline in third quarter revenue from the previous quarter, coupled with softening U.S. oil and gas activity, indicates potential challenges in maintaining consistent revenue growth.
  
• The company expects a seasonally weaker fourth quarter due to global oil supply-demand imbalances, which could further compress margins and affect profitability.
  
• Adjusted EBITDA margins dropped to 6% in the third quarter, down from earlier in the year, due to lower sales and adjusted gross margins, indicating pressure on net earnings.

Valuation

• The analysts have a consensus price target of $17.25 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 $3.4 billion, earnings will come to $109.3 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 7.4%.
• Given the current share price of $13.18, the analyst's price target of $17.25 is 23.6% 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.