McDermott Upgraded to Neutral - Analyst Blog
05 März 2013 - 7:40PM
Zacks
On Mar 4, 2013, we upgraded energy-focused engineering and
construction firm McDermott International Inc.
(MDR) to Neutral from Underperform, reflecting a balanced
risk/reward profile.
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
sheet.
Detailed Analysis
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 construction.
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
price level.
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
at Range Resources Corp. (RRC), Linn Co.
LLC (LNCO) and Enerplus Corp. (ERF) 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 current
levels.
ENERPLUS CORP (ERF): Free Stock Analysis Report
LINN CO LLC (LNCO): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
RANGE RESOURCES (RRC): Free Stock Analysis Report
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