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Analyst Blog

Nilanjan Choudhury

6 Reasons to Buy McDermott International (MDR) Stock Now

MDR SU FANG UPLMQ

Trades from $3

The oil market faces many uncertainties and it may not be time to buy stocks indiscriminately, but McDermott International Inc. (MDR - Free Report) looks like a pretty compelling investment.

Though some investors might be worried about the energy-focused engineering and construction firm’s immediate future due to the cyclical downturn across the markets it serves, we believe the Zacks Rank #1 (Strong Buy) company's broad product portfolio and strong geographical footprint insulates the operations to a large extent and increases its attractiveness as an investment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hence, it’s the right time to add the stock to your portfolio.

Rationale

Exciting Stock Performance: Shares are at fresh highs these days, and the stock has recovered nicely from its rough start to 2016 when oil prices fell to a 12-year low. In addition to significantly outperforming the Zacks categorized Oil Field Machineries & Equipment industry year-to-date, McDermott scrip has almost doubled over the same period and all of this does not stem from the rise in oil prices.

The stock price rally is backed by solid fundamentals, which will lead to long-term earnings growth.  

Impressive Earnings History: McDermott has an incredible history when it comes to beating earnings estimates.  As we know, a history of positive earnings surprise generally works as a catalyst in sending a stock higher. It indicates the company’s ability to surpass the estimates. So, investors take it in their consideration while betting on the stock with the expectation that the company will do the same trick to outpace the estimates in the upcoming release.

Investors should note that the company hasn’t missed earnings estimates since late-2014, as you can see in the chart below:

MCDERMOTT INTL Price and EPS Surprise

 

MCDERMOTT INTL Price and EPS Surprise | MCDERMOTT INTL Quote

A Leading Provider of Offshore Services: McDermott is a leading global engineering and construction firm that has a diversified product portfolio, specialty manufacturing and service capabilities, and proprietary technological expertise. Unlike other engineering and construction companies, McDermott is well-entrenched in major offshore energy projects and is one of the few global contractors that can provide a complete array of services – from design to construction.

Healthy Relationship with National Oil Companies: McDermott has got significant presence in countries where state-owned entities continue to scout for production growth and new resources. This helps the company to notch up contract wins regularly even in a low commodity price environment. Saudi Aramco – Saudi Arabia’s national oil company – alone makes up more than a fourth of McDermott’s total revenue.

Robust Backlog: McDermott’s backlog, which now stands at $3.9 billion, not only reflects steady demand from its customers but also offers long-term earnings and cash flow visibility. Importantly, of the total backlog, the company currently expects approximately $2.4 billion to roll off in 2017. This provides a strong foundation for next year irrespective of market conditions and the recovery cycle.

Margin Improvement: The past few recent quarters saw McDermott improve its gross margin consistently, highlighting the company's success in cost restructuring programs and excellence in project execution in this difficult environment.

Other Stocks Worth a Look

Apart from McDermott International, investors interested in the energy industry may consider stocks like Ultra Petroleum Corp. (UPLMQ - Free Report) , Diamondback Energy Inc. (FANG - Free Report) and Suncor Energy Inc. (SU - Free Report) . All these stocks carry a Zacks Rank #1

The 2016 Zacks Consensus Estimate for Ultra Petroleum is $1.63, representing 426% earnings per share growth over 2015. The next year’s average forecast is $2.67, pointing to 64% growth.

Diamondback Energy has an excellent earnings surprise history. It surpassed estimates in each of the last four quarters at an average rate of 74.13%.

Suncor Energy's expected EPS growth rate for 3 to 5 years currently stands at 22% –– comfortably ahead of the industry growth rate of 18.90%.

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