Insider selling occurs for all kinds of reasons: wanting to diversify holdings, believing that company stock is overvalued, or using cash for personal needs. However, insider buying occurs for only one reason: executives believe their shares are significantly undervalued. McDermott International (MDR) is a leading engineering, procurement, construction and installation ("EPCI") company focused on executing complex offshore oil and gas projects worldwide. The Company delivers fixed and floating production facilities, pipelines and subsea systems from concept to commissioning.
After the close yesterday (June 6th, 2012), SEC filings showed major insider buying from 4 executives. Stephen Johnson, CEO, bought 102,368 shares, while 2 other directors and a Sr. VP bought a total of 175,000 shares. In total, the 4 executives bought roughly $2.6M shares worth of stock. Prior to these buys, there has been no insider buying during the past 12 months.
Reasons to like MDR:
- Trades at 10x 2012 expected earnings of $.96/share. Earnings estimates have been trending higher over the last 90 days.
- The company has grown its backlog to $5.8B on March 31st, 2012, compared to $3.9B and $4.8B at December 31, 2011 and March 31, 2011, respectively.
- The company has won several large contracts this year, including INPEX Ichthys subsea contract on Jan 25th, 2012. UBS analyst anticipates the contract could be worth $1.5B.
- Solid balance sheet with $843M in cash, and only $82M in long-term debt.
- After the latest earnings report, JP Morgan and DA Davidson both upgraded shares on May 14th. The average analyst target is $16.33, or 67% above today's price.
Shares are down 50% over the past 52 weeks. Earnings have not lived up to expectations during that time period, but this could be changing. The insider buying signals that executives have regained confidence in their execution and expect shares to rebound. Recent contract wins and an increased backlog should lead to higher earnings in 2012. With proper execution by management, shares can trade back to $15-$17 over the next 12 months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.