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McDermott International Presents Significant Opportunity

Jul. 29, 2013 9:40 AM ETMDRIQ
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McDermott International (MDR) stockholders may not be very happy right now, having seen their shares this year fall from a high in the low $13's to a low in the low $8's in just a few short months. But there is reason for optimism in the short, medium and longer term views. Anyone looking to open a new long in MDR is in a great position and any existing shareholder looking to lower their cost basis is also in a uniquely strong position to do so.

Consider their valuation

2.07 billion market cap

~507 million in cash

~100 million in LT debt

Leaving an enterprise value around 1.6 billion for a company projected to earn around 200 million next year, assuming they can execute on their efforts to bring back their margins. And their projected 5-year EPS growth rate is pegged at 16.9%, if this materializes you've got a company selling for 1.6 billion that could be making around 300 million a year in 5 years from now. That's got a two bagger written all over it. And if Wall Street gets enthusiastic about the sector it could be well in excess of a double.

Primarily the best aspect to me of their current situation is the value inherent in the current price relative to the strong secular growth in their markets. They did have a slip up in their last earnings report, and that may continue into the next report. Time will truly tell if it's a temporary phenomenon or a signal of a failing management team. But in an investing world of probabilities, given a strong balance sheet and situated within an industry that is seeing healthy growth, it seems worth an investment.

With oil back over $100 and the potential of it resting there, there should be a tangible uptick in capex worldwide in coming years. McDermott need not get aggressive to steal market share from competitors as there will be ample demand for all the companies services.

Their backlog as of their last quarterly report stood at 5.3 billion, and their projected markets are projected to grow at healthy rates. In particular their subsea engineering division's market, that they just acquired, is set to see growth at a robust 9% CAGR.

Disclosure: I am long MDR.

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