McDermott: A Pullback Makes This $10 Oil Stock Too Cheap To Ignore

| About: McDermott International, (MDR)

McDermott International (NYSE:MDR) is based in Houston, Texas and it offers engineering and construction services to the oil and gas industry. It primarily builds drilling platforms, and other structures related to the offshore industry which is expected to see solid growth in the coming years.

McDermott shares were recently trading around $13.50. However, after the company announced financial results, the stock plunged to just over $10 per share. While earnings came in below expectations, the sell-off in the stock seems to be excessive and this has created a solid buying opportunity for longer-term investors.

The company earned $40.5 million or 17 cents per share during the fourth quarter of 2012. Consensus analyst estimates were at 23 cents per share. McDermott reported a 22% increase in revenues which totaled $996 million, much of which was fueled by strong growth in Asia. For the full year, McDermott earned 87 cents per share. Based on the current share price, the price to earnings ratio is just about 12, which is below the average stock in the S&P 500 Index (NYSEARCA:SPY) of about 15 times earnings.

McDermott has a very strong balance sheet with about $659 million in cash and just around $103 million in debt. This solid financial position reduces risks for the company and its shareholders. Furthermore, this stock trades for just a small premium to book value, which is $7.75 per share. Another positive factor is that some analysts and investors believe that McDermott is a potential takeover target. This stock doesn't need a takeover in order to rebound, but if it does happen, it could be a nice bonus for shareholders.

As with most stocks in the oil sector, a significant decline in the price of oil, or a major recession would likely put additional pressure on these shares, however, McDermott is a leader in this industry and with a rock-solid balance sheet, takeover potential, and a low price to earnings multiple, investors should consider picking up some shares during this pullback.

Key Data Points For McDermott From Yahoo Finance:
Current Share Price: $10.50
52-Week Range: $9.04 to $14.23
Dividend: none
2013 Earnings Estimate: 78 cents per share
2014 Earnings Estimate: $1.11 per share
P/E Ratio: about 12 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MDR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.