McDermott International (NYSE:MDR) is based in Houston, Texas and it is a global leader in engineering and construction services for the oil and gas industry. This company has faced significant operational and management execution issues which have caused the company to post losses. As a result of disappointing financial results in 2013, the stock price has declined significantly and now trades not far from the 52-week lows. However, the company appears to be taking action to improve results, the balance sheet remains very strong, and the long term outlook is bright for this industry. In addition, McDermott has one of the best-known brands in the oil services sector and it could even be a takeover target. It appears that these and other positives have now captured the attention of CNBC's Jim Cramer who, in this CNBC article and video recently said:
"However, I think you can use that tax-loss induced weakness to slowly build a position in what could turn out be a tremendous speculative turnaround stock for 2014."
Cramer is clearly excited about this company's recent management changes and its turnaround potential. Cramer has a very wide following and the fact that this oil stock is now on his radar means it could continue to get plenty of attention on his "Mad Money" show in 2014. Now that the tax-loss selling pressure Cramer talked about above is nearly gone, there might not be much left to hold this stock back from big gains in 2014. Let's take a closer look:
One of the biggest reasons for poor financial results this year has been caused by McDermott bidding too low on some major projects and not controlling costs in some cases. It appears that the company is making management changes in order to improve future results and show that accountability matters. For example, its CEO and president, Stephen Johnson, (62 years old) will retire by 2014 and will be replaced by David Dickson, a 45 year old executive from Technip SA which is a major French company that is a leader in the oil industry. In August, the company also announced that John T. McCormack (66 years old), the Executive Vice President and Chief Operating Officer, would "retire", effective in the fourth quarter of this year. Personally, I think it is great that some top executives who were in place when McDermott has produced disappointing results are "retiring" and now are being replaced with very experienced and yet much younger and possibly highly motivated executives.
One article points out a number of positives which includes the fact that Westfield Capital (a value oriented fund with about $15 billion in assets under management), has been buying McDermott shares, that McDermott has a multi-billion dollar contract backlog, and that management seems serious about rectifying the issues. The article also states that analysts expect McDermott to grow by about 18% annually over the next few years.
A Bloomberg article suggests that McDermott could be a takeover target and details some of the companies that might be interested in pursuing a deal; it states:
"After its decline, competitors Saipem SpA (SPM) and Technip SA (TEC) could pursue McDermott to gain its fleet of offshore vessels for installing heavy pipelines, according to Capital One Financial Corp. (NYSE:COF) McDermott may even attract more traditional engineering and construction companies such as KBR Inc. (NYSE:KBR) and Foster Wheeler AG (NASDAQ:FWLT), Stephens Inc. said."
"The McDermott name is well-recognized globally," Michael Marino, an analyst at Stephens Inc. in Houston, said in a phone interview.
"There's some value in that, which someone might find attractive."
As the global population continues to grow, demand for oil will also rise and this bodes well for McDermott. The company has an excellent long-term track record of executing major projects and delivering profits. For example, McDermott has posted solid profits for every single year since 2004. Company profits seem to have peaked just as oil did because in 2007, it earned $2.66 per share, and in 2008, it earned $1.86 per share. At that time, the stock traded for well over $60 per share. This gives investors an idea of the huge potential this stock could have in the long run if the company management performs as it has in the past. With the shares at just about $7 now, a return to a peak of nearly $70 per share (as it traded in 2008), would produce a potential ten-bagger! Since the company has a strong balance sheet, it remains well positioned for a profit turnaround and this financial strength reduces risks for investors.
When comparing valuations of a couple other stocks in the oil services industry, McDermott looks downright cheap. For example, analysts expect it to earn about 42 cents per share in 2014, and around 85 cents for 2015. Compare that to shares of Basic Energy Services (NYSE:BAS) which trade for about $15. Analysts expect this company to lose money in 2013 and 2014. Key Energy Services (NYSE:KEG) trades for about $7.80 per share and analysts expect it to earn just 31 cents per share for 2014. Based on these two examples, McDermott shares appear to have substantial upside, especially when you consider that McDermott has a far superior balance sheet as both Key and Basic Energy have very significant debt loads of several hundreds of millions of dollars each. By contrast, McDermott has a very strong balance sheet with about $282 million in cash and just around $94 million in debt.
Potential downside risks to consider include: a decline in oil prices which could impact construction spending in the oil industry, poor management execution in bidding new contracts, or another global recession. However, these potential risks seem very limited now since oil prices and the oil industry are likely to remain healthy as the global economy grows. The management execution risks may also be limited as the company hired an experienced CEO to takeover.
After such a tough year for the stock, it is not unusual for shorts to be piling on and for it to come under significant pressure due to end of the year tax loss selling. However, this is just another reason why there is a huge buying opportunity for savvy investors to take advantage of now. Stocks that fit this profile often rebound sharply into January because investors stop selling to harvest tax losses. Furthermore, shorts can suddenly see strength in the share price that could even lead to a short squeeze. According to Shortsqueeze.com, nearly 35 million shares have been sold short. With an average daily volume of around 4 million shares, the short interest is equivalent to nearly 8 days worth of trading volume or about 15% of the float. This significant short interest is just one more reason why I expect this stock to surge into January 2014. The tax loss selling Cramer discussed above seemed to be highly beneficial to the shorts, but with that over in just days, and about 15% of the float short, shorts might end up scrambling in early January to cover Cramer's "tremendous speculative turnaround stock for 2014."
Buying beaten-down stocks that can rebound in a "January Effect Rally" is a great strategy to use at the end of the year. To read more about this strategy and see another low-priced stock pick that could rebound soon see this article.
Here are some key points for McDermott:
Current share price: $8.60
The 52 week range is $6.68 to $13.48
Earnings estimates for 2013: a loss of 67 cents per share
Earnings estimates for 2014: a profit of 42 cents per share
Annual dividend: none