MRC Global: Despite 2 Modest International Acquisitions, Shares Offer Little Appeal

Dec.11.13 | About: MRC Global (MRC)

Investors in MRC Global (NYSE:MRC) are hardly reacting on the news that the company announced the acquisition of two international companies, marking a major step in its strategic ambitions to grow its international activities.

Despite the modest deals, the appeal of the shares is not strong enough for me. The premium valuation, combined with the recent strong momentum, has pushed shares up a bit too much to initiate a position at these levels.

The Deals

MRC announced that it has entered into two agreements to acquire foreign companies. For $260 million it will acquire privately held Stream AS, a Norwegian company generating revenues of $273 million per annum.

Stream is the leading pipe, valve and fittings distributor as well as flow control products provider for companies operating in the Norwegian Continental Shelf. The 500 employees, including 100 engineers, will become part of MRC's operations.

On top of this deal, MRC bought Scottish Flangefitt Stainless without publishing a price. The company is much smaller, expected to generate annual revenues of $28 million this year.

Valuation

At the end of October, MRC reported its third quarter results. The company ended the period with $33.4 million in cash. Total debt stands at $1.04 billion, for a net debt position of just over a billion.

Revenues for the first nine months of 2013 came in at $3.89 billion, down 8.9% on the year before. Earnings inched up slightly to $128.8 million as 2012s earnings were impacted by higher interest expense and debt extinguishment costs. At this pace annual revenues are seen around $5.2 billion, as earnings could come in around $175 million.

Trading around $32 per share, the market values MRC at $3.2 billion. This values equity in the firm at just 0.6 times annual revenues and 18-19 times anneal earnings.

MRC Global does not pay a dividend at the moment.

Some Historical Perspective

Shares of MRC Global were sold to the general public in April of 2012 at a price of $21 per share. Ever since, shares have risen to highs of $34 per share in May of this year. Shares fell by about a third to $24 in August, after the company lowered its full year outlook. Ever since, shares have recovered to current levels at $32 per share.

Between 2009 and 2012, MRC Global increased its annual revenues by a cumulative 50% to nearly $5.6 billion. After posting large losses in 2009, the company has steadily improved its earnings.

Investment Thesis

The two deals have little impact on MRC's operations, adding roughly $300 million or close to 6% in annual revenues. The company did not release many details regarding the profitability of the acquired assets.

Based on the 1.0 times revenue multiple for the acquisition of Stream AS, the company is paying a premium to its own valuation of 0.6 times annual revenues. While the addition is small in terms of MRC's entire operations, it adds significantly to the company's ambitions to achieve $1.0 billion in international sales by 2015.

Despite this nice strategic direction, reducing its dependence on national sales, MRC is facing some headwinds. This includes the reduction in the oil country tubular goods business, which carries low margins. The cutback reduced sales from nearly 13% of total sales last year to 8% over the past quarter. Even despite this wind down, sales in other businesses were modestly declining as well after witnessing years of strong growth.

I remain in doubt about MRC. At current rates, shares trade at premium multiples, yet it operates in a long-term growth industry. The company has furthermore demonstrated meaningful revenue and earnings growth despite a difficult 2013. This makes shares reasonably cheap, especially if MRC can restore its growth trajectory, warranting a premium valuation.

That being said, shares have seen a roughly 40% run up from August's lows little over three months ago. For that reason alone, combined with the somewhat premium valuation despite this year's struggles, I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.