On Mar 4, 2013, we upgraded energy-focused engineering and
McDermott International Inc.
) to Neutral from Underperform, reflecting a balanced risk/reward
Why the Upgrade?
Given its geographic footprint in high-growth regions, technology
leadership and efficient execution skills, the company is poised
to benefit from the strong industry fundamentals for offshore
construction activities through 2013 and beyond.
We believe order flow and backlog for McDermott's products and
services will continue to be healthy and trend higher in the
near-to-medium term. Additional positives in the McDermott story
include growing international operations and a solid balance
McDermott has a diversified product portfolio, specialty
manufacturing and service capabilities, and proprietary
technological expertise. Unlike other engineering and
construction companies, McDermott is well-entrenched in major
offshore energy projects and is one of the few global contractors
that can provide a complete array of services - from design to
McDermott has strong presences in most major offshore producing
regions around the world, including the U.S., Canada, Mexico, the
Middle East, India, the Caspian Sea and Asia-Pacific. The
company's robust backlog, which now stands at more than $5
billion, not only reflects steady demand from its customers but
also offers long-term earnings and cash flow visibility.
McDermott also possesses a solid balance sheet (cash and cash
equivalents of $640 million against long-term debt of just over
$100 million), which has been a real asset in this highly
uncertain period for the economy.
However, we believe these positives are already reflected in its
current valuation, so there is not much upside from the current
Due to McDermott's exclusive focus on the offshore oil and gas
business and the tentative commodity price outlook over the next
few quarters, we believe investor sentiment towards the company
will remain lukewarm. We further believe that transfer of the
power generation and government operations (post-split) has left
McDermott with a less diversified business, thereby heightening
its risk profile.
Stocks That Warrant a Look
While we expect McDermott to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
Range Resources Corp.
Linn Co. LLC
) as good buying opportunities. These oil and natural gas
explorers - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from
ENERPLUS CORP (ERF): Free Stock Analysis
LINN CO LLC (LNCO): Free Stock Analysis
MCDERMOTT INTL (MDR): Free Stock Analysis
RANGE RESOURCES (RRC): Free Stock Analysis
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