Inside Wall Street: Expect a McDermott snapback

Despite a miss in Q4 results, analysts see a rosy 2014 outlook for this global oil services leader.

By Gene Marcial Mar 12, 2013 12:02PM

Oil Well Pumpjack copyright Roger Milley, Vetta, Getty ImagesDon't count out McDermott International (MDR) -- one of the few major stocks that missed the market's largest advance in four years on March 11, 2013.


McDermott has been an unusually subpar performer, tumbling that same day to $10.84, not far from its 52-week low of $9.83, from $13 just about a month ago.


Poor productivity in some of its major markets caused McDermott to miss Wall Street's consensus fourth-quarter earnings projection. Significant cost increases from project overruns combined with lower production in the Asia-Pacific and Atlantic regions resulted in the company posting earnings of 17 cents a share, off from analysts' consensus forecast of 23 cents.


A leading engineering, procurement, construction and installation company, McDermott executes major and complex offshore oil-and-gas projects worldwide for international oil companies, providing such essential services as fixed and floating production facilities, pipelines, and subsea systems.


The stock's sharply reduced valuation combined with a rosy outlook for 2014 make McDermott's valuation more attractive, says Michael Marino, analyst at investment bank Stephens.


"We like the risk/reward ratio and we think investors should not lose sight of the potential for 2014," he says. The favorable outlook for results in 2014 "will become more apparent over the next nine months as the Atlantic division returns to profitability and order flow increases," says Marino.


He expects the stock to snap back from its low levels and climb to $15 a share. Marino points out that given several positive catalysts and the stock's depressed valuation, "we continue to rate McDermott as a Best Idea and are maintaining our overweight rating."


He concedes that the return to profitability in the Atlantic division is getting pushed back "as the company's Gulf Coast yard struggles to perform up to expectations." However, Marino expects the Atlantic unit to become profitable later in the year as management tries to pass through  higher costs in the Gulf.


McDermott's stock has given back up all of its gains this year, notes Marino, trading at 17 times his new low-end earnings estimate of 62 cents a share, versus a historical  range of 10 to 20 times. Marino thinks the stock should trade closer to a mid-cycle multiple of 15 times of normalized earnings of $1 a share, which equates to a stock price of $15 a share.


Ultimately, the analyst believes 2014 has the potential to be more representative of an up-cycle year, "given the broader macro-trends, current (order) backlog and bids (for projects) outstanding," he says.               


Here's what investors should consider, points out Marino: Even if the stock just holds its current multiple and earnings trend, he thinks that with the Atlantic yard moving to profitability by year end, the stock could trade at his $15 a share price target.


Analyst Robert V. Connors of investment firm Stifel Nicolaus also remains bullish on McDermott, based on his higher earnings estimate of 84 cents a share on revenues of $3.4 billion for 2013, and $1.17 for 2014 on revenues of $3.96 billion. The company earned 86 a share in 2012, on revenues of $3.6 billion.


Barclays Capital's Andy Kaplowitz, also continues to be optimistic as well and rates McDermott as "overweight." He forecasts a higher price target of $16 a share.


"We think it is important that investors take a balanced view to evaluate McDermott's fourth quarter results," argues the analyst.  The truth is, McDermott's  operating profits "were generally in line with our expectations, with bookings that we view as solid," says Kaplowitz.   


In sum, investors looking for an energy play that has yet to join the stock market's continuing advance, McDermott presents a reasonably attractive opportunity.



Tags: MDRoil


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