Stock Trade – McDermott International (NYSE:MDR) 
Sunday, March 10, 2014

STOCK TRADE: Buy MDR at market price (approx. $7.82), good for the day. Place a protective stop-loss at $5.00 and a pre-determined sell at $13.00.

by Ian Harvey

March 10, 2014


In 2013, oil and gas companies were expected to spend $644 billion. This year, oil and gas companies are expected to spend $723 billion.

A large part of this money is being spent on offshore drilling. With oil prices high, countries like Brazil, China, Japan, Thailand, India, and even the U.S. are ramping up offshore drilling projects in an effort to find crude oil in untapped areas.

The biggest beneficiaries of this trend would be the infrastructure companies that build the massive offshore platforms.

One such infrastructure companies is McDermott International (NYSE: MDR), which is selling off right now but presents a great buying opportunity.

McDermott designs, builds, and installs the complicated structures and equipment involved in offshore projects. It’s one of the few infrastructure companies with a long history – over 50 years – of offshore expertise.

But the company has had some setbacks over the past few years. It has missed earnings estimates the past several quarters due to plant outages, lower margin orders, and several delays at key projects.

And on Monday, the company announced it missed earnings estimates in the most recent quarter by a mile due to delayed projects. More important, management said that it will no longer provide earnings guidance as it undergoes “organization changes.”

When a company says it will no longer provide earnings guidance, investors usually run for the exits. Shares fell 8% on the news.

To add to McDermott’s woes, several analysts who cover the company downgraded it following the last quarter. Some believe the company could have liquidity concerns later this year. Others believe the stock will do nothing in 2014.

McDermott has fallen 70% since March 2011. In the same period, the S&P 500 Index is up more than 40%.

After so many setbacks, many investors (and analysts) are quick to give up on the stock. But a deeper look into McDermott reveals it could offer huge returns with limited risk.

Read further to see the positive side of this stock…..

Company Details

McDermott International, Inc. is an engineering, procurement, construction and installation (EPCI) company. The Company is focused on designing and executing complex offshore oil and gas projects worldwide.

The Company provides fully integrated EPCI services; it delivers fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning.

Its business segments consist of Asia Pacific, Atlantic, Caspian and the Middle East.

On March 19, 2012, the Company completed the sale of its former charter fleet business, which operated 10 of the 14 vessels.

Key Statistics for MDR

Current P/E Ratio (ttm) -
Estimated P/E(12/2014) 50.7792
Relative P/E vs. SPX -
Earnings Per Share (USD) (ttm) -1.8935
Est. EPS (USD) (12/2014) 0.1540
Est. PEG Ratio 3.2761
Market Cap (M USD) 1,854.49
Shares Outstanding (M) 237.15
30 Day Average Volume 5,571,090
Price/Book (mrq) 1.3742
Price/Sale (ttm) 0.6949
Dividend Indicated Gross Yield -%
Cash Dividend (USD) -
Dividend Ex-Date 08/02/2000
5 Year Dividend Growth -
Next Earnings Announcement 05/08/2014
mrq = Most Recent Quarter; ttm = Trailing Twelve Months

Technical Outlook

McDermott International has a 52-week low of $6.68 and a 52-week high of $11.38. The stock’s 50-day moving average is $8.53 and its 200-day moving average is $7.98.

The company’s market cap is $1.747 billion.


McDermott International last posted its quarterly earnings results on Monday, March 3rd. The company reported ($1.37) earnings per share for the quarter, missing the analysts’ consensus estimate of $0.15 by $1.52. The company had revenue of $517.00 million for the quarter, compared to the consensus estimate of $825.61 million.

During the same quarter last year, the company posted $0.17 earnings per share. McDermott International’s revenue was down 48.1% compared to the same quarter last year. Analysts expect that McDermott International will post $0.38 EPS for the current fiscal year.

Reasons for Price Increase

The revenue from McDermott’s delayed projects last quarter is expected to hit the top line later this year. In other words, this business was not lost. That’s why analysts sharply lowered earnings estimates for next quarter, but just slightly lowered their annual numbers.

McDermott said its backlog of business stands at $4.8 billion. This is a big number, considering the company generated just $3 billion in revenue in 2013.

And there’s one thing analysts and investors are ignoring: McDermott plans to bid on $16 billion worth of new projects over the next five quarters. Remember, oil and gas companies are spending a record amount of cash to find crude oil offshore.

Even if McDermott lands just 15% of these projects, the company would more than double sales (if you include the $4.8 billion in current backlog). And news of just one contract win could push shares up significantly from these super-depressed levels.

In the meantime, the company’s new management team is launching an aggressive cost-cutting program. This includes selling non-core assets and restructuring debt. Many analysts are also overlooking this. There was not one analyst that adjusted McDermott’s earnings positively for this massive cost-cutting program.

Analysts Opinions

McDermott International (NYSE:MDR) had its target price reduced by DA Davidson from $9.00 to $8.00 in a report issued on Tuesday, 4th March, 2014.

Also, the company has been the subject of a number of research reports:-

• Analysts at Stephens downgraded shares of McDermott International from an overweight rating to an equal weight rating in a research note on Tuesday.

• Separately, analysts at Deutsche Bank raised their price target on shares of McDermott International from $8.00 to $10.00 in a research note on Friday, January 17th.

• Finally, analysts at Zacks reiterated a neutral rating on shares of McDermott International in a research note on Monday, December 30th. They now have a $9.25 price target on the stock.

Three research analysts have rated the stock with a sell rating, seven have issued a hold rating and three have assigned a buy rating to the company’s stock. The company has a consensus rating of Hold and a consensus price target of $9.92.


McDermott is trading not far from book value (liquidation value). And anyone who wanted to sell has already sold by this point. This gives investors downside protection. Most analysts that downgraded the stock still have a target of $8 and above.

Based on estimates, McDermott could easily give investors a nice return within a short time.

Therefore, based on the facts above the following stock trade is recommended…..

**STOCK TRADE: Buy MDR at market price (approx. $7.82), good for the day. Place a protective stop-loss at $5.00 and a pre-determined sell at $13.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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