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Here's Why McDermott International Is Plunging Today

By Maxx Chatsko – Sep 18, 2019 at 2:38PM

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The engineering and construction company is working with an outside consulting firm on a turnaround strategy. Those tend to be painful.

What happened

Shares of McDermott International (MDR) fell 49% today before trading was halted. The company later released a short statement saying it had engaged with outside advisors, as it routinely does in the course of normal operations, to evaluate opportunities for the business. There's more to the story than that.

According to The Wall Street Journal, the offshore oil-and-gas engineering and construction company is working with turnaround consulting experts AlixPartners. The move makes sense considering McDermott International has been struggling to deliver profitable operations in recent quarters. That said, turnaround strategies are often a little painful to implement and accompanied by a good deal of uncertainty, which is the worst thing that can happen to a stock.

As of 1:48 p.m. EDT, shares remained halted at a roughly 49% loss for the day.

A pink line graph crashing through the x-axis of a chart.

Image source: Getty Images.

So what

McDermott International reported a first-half 2019 operating loss of $48 million and a net loss of $216 million. It reported an operating cash outflow of $449 million in that span. That hasn't stopped management from maintaining an optimistic outlook for the near future. CEO David Dickson told investors to expect a "sharp improvement" in operating income by the end of 2019.

Today's news suggests those improvement efforts may not be materializing as expected or that the acquisition of Chicago Bridge & Iron isn't panning out as expected. Of course, it's also possible that investors are sharply overreacting to the news.

Now what

Investors are right to be cautious about McDermott International. The business doesn't appear to be close to generating enough operating profit to offset interest expense, which means it might be generating net losses for the foreseeable future. It might be tempting to consider this a value stock following a nearly 50% drop, but investors should take a wait-and-see approach until more details are available.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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