2023-07-28 10:23:20 ET
Summary
- MRC Global Inc. (MRC) is a $943-million market cap Houston-based company that distributes pipes, valves, fittings, and infrastructure products to the gas utility, energy, and industrial sectors.
- In Q1 FY2023, MRC saw a strong performance, with consolidated revenue of $885 million and operating income of $57 million rising by 19.3% and 96.6% YoY, respectively.
- I think the market may underestimate growth forecasts after FY2023, which is a recovery year for MRC, considering all available growth drivers.
- With an implied P/E of 6.17x and an EPS growth rate of 14.61% for FY2024, MRC looks strongly undervalued to me.
- I think MRC stock is a "Buy" at its current price levels despite potential macro headwinds.
The Company
MRC Global Inc. ( MRC ) is a $943-million market cap Houston-based company that distributes pipes, valves, fittings, and infrastructure products to the gas utility, energy, and industrial sectors. Source
They specialize in serving industries that operate in extreme conditions and have 3 segments catering to different sectors within the energy industry.
As you can see from the revenue breakdown above, in Q1 FY2023 MRC saw a strong performance, with consolidated revenue of $885 million and operating income of $57 million rising by 19.3% and 96.6% YoY, respectively.
Looking deeper into the 10-Q's notes, we see that the DIET (Downstream, Industrial, and Energy Transition) segment had significant revenue growth [+13.3% YoY], driven by LNG projects and turnaround and maintenance spending by refining and chemical customers. The PTI (Production and Transmission Infrastructure) segment also saw revenue improvement [+22.45% YoY], benefiting from the firm's increased focus on Permian Basin opportunities. The Gas Utilities business performed well with a 13% YoY sales growth, driven by safety-related modernization and infrastructure improvement projects:
The share of SG&A expense of total sales dropped from 14.42% last year to 13.79%, so MRC's adjusted EBITDA amounted to $69 million, a 44% YoY increase amid EBITDA margins of 7.8% [an improvement of 133 basis points YoY].
Cash from operations for Q1 FY2023 was negative $30 million, but the management expected [based on the latest earnings call from May] the firm to generate cash in each of the remaining quarters of FY2023, aiming to achieve a full-year CFO goal of $120 million or more. The cash outflow for Q1 is explained by net working capital, which rose significantly and now is expected to gradually decline each quarter due to reduced inventory and increased revenue.
Debt on the company's balance sheet increased, but not significantly - the leverage ratio on a net debt basis was 1.2 times, an improvement over the previous year. I also don't see any major concerns from a debt-to-equity perspective:
The management reiterated its FY2023 outlook, expecting double-digit percentage revenue growth. Q2 sales are likely going to be driven by the gas utility business, with continued growth in Q3 before the normal seasonal decline in Q4. The FY2023 EBITDA margins are guided to surpass 8%. The CAPEX is going to remain in the range of $10-15 million for the year.
I think the market is taking a somewhat pessimistic view of management's words. The guidance of "double-digit revenue growth for FY2023", for example, is priced in at the very bottom :
At the same time, the projected EBITDA margin growth may mean that perhaps more aggressive revenue growth in Q2, Q3, and Q4 will lead to higher EPS growth than expected. Even if there are no EPS surprises, MRC's currently projected year-over-year growth of nearly 31% looks impressive.
The management sees multiple growth drivers for the next few years in each of its business segments [based on the latest IR materials].
In the Gas Utilities market, growth is expected from safety and integrity projects, meter modernization, emissions reduction programs, new installations in high-growth regions, and increasing customer budgets.
The DIET segment should see growth driven by global energy transition projects, petrochemical investments, expansion of LNG facilities, and increased activity in chemicals and refining.
Meanwhile, the PRI operations should benefit from increased well completion and processing, growing demand for US LNG exports to Europe, investment from industry consolidation, market penetration with smaller producers, and the need for transmission expansion projects.
For this reason, the market may underestimate growth forecasts after FY2023, which is a recovery year for MRC, considering all available growth drivers.
But how fairly does an investor pay for MRC stock today? Let's figure it out.
Valuation
According to Seeking Alpha's Quant Rating system, MRC Global has a solid "A-" rating and is currently trading at 20-70% below the median of the Industrials sector on some important valuation metrics:
However, I usually try not to look at the entire sector, but at the closest group of companies in terms of business activity and market capitalization to talk about the presence of undervaluation (or overvaluation).
It was not easy to select publicly traded companies that perform exactly the same activities as MRC - especially if you also focus on market capitalization. The company that I think is most comparable to MRC is NOW Inc. ( DNOW ), which turned out to be a much higher-valued company with a lower implied long-term EPS growth rate:
I primarily looked at long-term EPS forecasts and compared them to implied P/E ratios because the coronavirus has ruined many companies' business operations and made TTM-based multiples irrelevant.
As you can see in the chart above, MRC turned out to be the most undervalued company of all, but at the same time with the lowest projected long-term EPS growth [+7.98% annually for the next 5 years].
I've heard in the analyst community that many judge the reasonableness of the P/E ratio by relating it to the growth rate [which is logical]. By that, I mean that if the P/E ratio is 10x, you also need to see a 10% growth rate to say that the company is close to its fair value. In MRC's case, with an implied P/E of 6.17x and an EPS growth rate of 14.61% for FY2024, I see a significant underestimate here.
The Bottom Line
It's imperative to note the multitude of risks that come with investing in MRC currently, as most leading macro indicators point towards difficult times ahead.
If these indicators really have a predictive power this time as well, then in about six months a recession should come, so companies from the industrial sector, to which the MRC belongs, will feel a strong blow in this case.
Moreover, it is far from certain that management's EBITDA margin forecasts will materialize - you have to understand that high expectations are punished harshly by the market if they are not met.
But looking at the company's valuation, management's efforts over the past few months, and EPS forecasts that seem a bit low to me, I think MRC stock is a "Buy" at its current price levels.
Thank you for reading!
For further details see:
MRC Global Stock Seems Too Cheap To Ignore