Why This $12.50 Stock Still Has Upside, Even After Recent 25% Run

Sep.13.12 | About: McDermott International, (MDR)

I have not written about McDermott International (NYSE:MDR) since early June, when the shares were just under $10. The stock is now at $12.50. Given some key recent catalysts, an improving technical picture, and its still reasonable valuation, I believe the stock continues to have upside.

Here are two recent key positives for McDermott:

  • Global Hunter Securities initiated shares of Mcdermott with a buy rating and a $16 price target on Wednesday. The analyst firm highlighted MDR's "robust backlog and sound underlying end-market dynamics related to robust oil prices and impressive offshore exploration successes" as reasons behind its buy rating.
  • The oil services construction sector has real momentum right now. Other construction firms in this sector such as Foster Wheeler (FWLT) and Flour (NYSE:FLR), both of which I own as well (click on links to see valuation cases for those stocks), have significantly outperformed the S&P in the last month (see chart below). Given these stocks' still cheap valuation, I would look for this outperformance to continue.

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According to the business description from Yahoo Finance, "McDermott International operates as an engineering, procurement, construction, and installation (EPCI) company worldwide."

Here are four reasons why McDermott still has upside from $12.50 a share:

  1. Even after the recent run-up, the stock still is selling near the bottom of its five-year valuation based on P/S, P/B, and P/CF.
  2. The stock sports a tiny five-year projected PEG (0.42) and sells for less than 12 times forward earnings, a discount to its five-year average (13.8).
  3. The company has almost $600 million in net cash on its balance sheet (over 20% of market capitalization at current levels).
  4. The stock spent the second quarter building a base at $10 a share. In third quarter, technical support moved up to an $11 level. McDermott now seems poised to break out and just crossed its 200-day moving average (see chart below).

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Disclosure: I am long FLR, FWLT, MDR. 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.