Over the past six months, MRC Global’s shares (currently trading at $12.58) have posted a disappointing 10.6% loss while the S&P 500 was down 2.2%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in MRC Global, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think MRC Global Will Underperform?
Despite the more favorable entry price, we're swiping left on MRC Global for now. Here are three reasons why we avoid MRC and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. MRC Global struggled to consistently generate demand over the last five years as its sales dropped at a 2.9% annual rate. This wasn’t a great result and is a sign of poor business quality. 
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for MRC Global, its EPS declined by more than its revenue over the last two years, dropping 33.4%. This tells us the company struggled to adjust to shrinking demand.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
MRC Global historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.9%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of MRC Global, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 10.6× forward P/E (or $12.58 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
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