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Here's Why Investors Should Bet on McDermott (MDR) Stock Now

Zacks Equity Research logoZacks Equity Research 8/23/2018 Zacks Equity Research

With crude supply normalizing and oil prices rebounding from multi-year lows, energy explorers have started increasing investments in the sector, bringing about improving prospects for oilfield services companies. As such, engineering and fabrication giant McDermott International, Inc. MDR looks quite a compelling investment choice for investors as of now.

Let’s take a look at the factors that make this company an attractive pick.

Merger With Chicago Bridge Makes McDermott More Spirited

McDermott has long been a leading global engineering and construction firm, well-entrenched in major offshore energy projects. In May 2018, the company completed its strategic merger with Chicago Bridge and Iron, which added onshore services to the offshore-focused portfolio of the company. The combination of the two entities has resulted in the creation of a fully-integrated onshore-offshore company, offering engineering, procurement, and construction and installation services to the energy sector.

The increased scale and diversification will thus position the company to capitalize effectively on growth opportunities, also leading to cost synergies. The new entity is expected to bring about pro-forma annual revenues of around $10 billion and generate annualized cost savings of roughly $250 million.

Association With Oil Companies is a Backlog Booster

McDermott has a significant presence in countries where state-owned entities continue to scout for production growth and new resources, helping the company to notch up contract wins regularly. Its strong relationships with National Oil Companies in the Middle East, especially Saudi Aramco, offer long-term earnings and impressive revenue pipeline. McDermott’s robust backlog, which now stands at $10.2 billion, not only reflects a steady demand from customers but also offers cash flow visibility.

Strong Second Quarter and Buoyant Outlook

McDermott managed to keep its earnings streak alive by posting fourth consecutive earnings beat in the second quarter of 2018 on the back of solid project execution. Its revenues surged around 120% year over year to stand at $1,735 million, surpassing the Zacks Consensus Estimate of $1,630 million. The rise in revenues was supported by Cameron and Freeport LNG projects, ethylene production project LACC, Saudi Aramco Safaniya 5 and Woodside Greater Western Flank II.

Factoring the strategic merger with Chicago Bridge and Iron, McDermott expects its revenues for the second half of 2018 in the band of $4.8-$5.1 billion, implying a whopping year-over-year increase of around 191%, at the midpoint of the guided range. Further, adjusted net income is estimated within $200-$210 million, reflecting a year-over-year rise of 65.3% from the midpoint of the guided range.

Other Favorable Readings

Solid Rank & VGM Score: McDermott currently has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 (Buy) offer the best investment opportunities for investors. Thus, the company appears to be a lucrative investment proposition at the moment.

An Outperformer: McDermott has outperformed the industry it belongs to over the past two years. The company’s shares have gained around 26% against 2.5% decline of the industry it belongs to in the said period.

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A Broker Favorite: McDermott’s earnings estimates reflect a healthy uptrend. Evidently, the Zacks Consensus Estimate for current-year earnings has moved 4.1% north in the past 60 days.

Given the wealth of information at brokers’ disposal, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions. This is because the direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

Other Stocks Worth a Look

Apart from McDermott, investors interested in the energy industry may also consider other top-ranked stocks like TC PipeLines, LP TCP, Eclipse Resources Corporation ECR and Petrobras PBR, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

TC Pipelines’ 2018 earnings are expected to grow 18.67% year over year.

Eclipse Resources pulled off an average positive earnings surprise of 183.33% in the trailing four quarters.

Petrobras delivered an average positive earnings surprise of 10.37% in the trailing four quarters.

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