This global construction company is in the process of a turnaround, led by new management. Recent earnings of $0.03 compared to the analysts estimates of -$0.06 indicates its fortunes are on the rise.
McDermott (MDR)
from The Turnaround Letter
McDermott (MDR) traces its roots back to 1923 when it built wooden drilling rigs in Texas. Today, it is a major global engineering and construction company with particular expertise in large, complex offshore energy projects.
Management miscues—including underbidding contracts, cost overruns and completion delays—led to a series of declines in earnings that began in 2007 and culminated in a large loss in 2013. This pushed the stock down from a high of 67 in early 2008 to a recent low below 3.
McDermott brought in a new CEO, David Dickson, in late 2013, and he has transformed almost the entire senior management team over the last year and a half. Dickson and his team have improved project execution, reduced delays and cost overruns and bid new contracts more realistically. As a result, the company turned in a small profit in the fourth quarter of 2014, its first quarterly profit since early 2013.
Management is also engaged in a longer-term project to improve efficiency and margins across the whole company. By centralizing certain operations and reducing headcount, it expects to save $50 million in 2015 and $100 million in 2016 (although there will be some one-time restructuring charges).
In spite of its recent missteps, McDermott has maintained a good reputation for complex offshore energy projects, and it has long-term relationships with many of the largest energy producers from around the globe. It has particularly strong relationships in the Middle East and Asia. For example, it has recently won major contracts with Saudi Aramco, Qatar Petroleum and Brunei Shell.
While investing in any energy-related company in the current environment involves risks, McDermott appears to have a sufficiently strong balance sheet to at least survive and likely prosper. It had the foresight (or good luck) to raise new debt last April before oil prices plummeted. Moreover, at the end of December, the company held cash roughly equal to its long-term debt, and it has no significant debt maturities before 2019.
Some analysts have projected that the revamped McDermott has the capability to earn $1 per share within a couple of years. Even if it can only achieve a fraction of that, the stock looks very cheap at its current level. We recommend buying McDermott International stock up to 5.50.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, April 2015