MDR McDermott International Inc

Shares of McDermott International (MDR) are currently trading close to its 52-week low of $9.34. The energy-focused engineering and construction firm has seen its share price fall approximately 50% since the beginning of July this year, as investors have been selling the stock for its weak fundamentals and tepid outlook. The disappointing third quarter results have added to this bearishness.

Incorporated in 1959, McDermott primarily serves the worldwide offshore oil and gas field development activities, including front-end design and detailed engineering, fabrication and installation of offshore drilling and production facilities, as well as installation of marine pipelines and subsea production systems.

Additionally, the company provides project management and procurement services. It operates in most major offshore oil and gas producing regions, including the U.S., Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

In August 2010, McDermott completed the spin-off of its ‘Power Generation Systems’ and ‘Government Operations’ segments into a separate, independent and publicly traded entity The Babcock & Wilcox Company (BWC).

McDermott recently reported lower-than-expected EPS for the September quarter – 4 cents versus the Zacks Consensus Estimate of 13 cents and the year-ago profit of 26 cents – adversely affected by higher costs and weak activity in the Middle East.

McDermott has already warned that its margins will suffer next year due to lower marine activity and fabrication work. Near-term bookings remain lumpy at the Texas-based engineering-to-project management services provider, as the current uncertain environment has hurt the economics of building new oil and gas infrastructure.

Moreover, we believe that the transfer of the power generation and government operations (post-split) has left McDermott with a less diversified business. As a result, the business risk profile of the reorganized McDermott is weaker than its earlier form.

Given these concerns, we expect McDermott to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

Partially offsetting these negatives are the company’s diversified product portfolio, specialty manufacturing and service capabilities, proprietary technological expertise, robust backlog and a solid balance sheet.

McDermott (NYSE:MDR)
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