MDR & GLBL best risk vs. reward plays in the patch ?
I'm taking SSB's call to another level here; going from pounding the table; to climbing on top of it & shouting "BUY" - and on any retrace to $17 3/4ish - I go to a "Swinging from the Chandelier" BUY call...75% in here - final 25% at a limit buy for $17 3/4's and then full margin throttle.... again in last 2 years; whenever MDR touched $19 - it turned & ran to $30 ish...
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smithbarneyresearch.com
MDR: Raising Rating to 1M
Salomon Smith Barney
Monday, September 20, 1999
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--SUMMARY:--Mc Dermott Int'l.--Oilfield Equipment & Services McDermott International has recently emerged from a comprehensive restructuring effort, dramatically improving the company's balance sheet, flexibility, and profitability. * We anticipate material improvement in Power Generation margins, as well as a strong rebound in marine construction demand, during the next 12-24 months. * Based on improving oilfield fundamentals, we are raising our fiscal (March) 2001 EPS estimate to $2.10 from $1.75. * With strong growth prospects, refocused operations, and a valuation of just 10.4x fiscal 2001 EPS, we are upgrading MDR shares to 1M from 2M. * We maintain our price target of $32 per share. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 03/99 EPS $0.55A $0.85A $0.66A $0.56A $2.60A Previous 03/00 EPS $0.33A $0.20E $0.32E $0.44E $1.30E Current 03/00 EPS $0.33A $0.20E $0.32E $0.44E $1.30E Previous 03/01 EPS $0.36E $0.37E $0.46E $0.55E $1.75E Current 03/01 EPS $0.44E $0.47E $0.56E $0.63E $2.10E Previous 03/02 EPS $N/A $N/A $N/A $N/A $N/A Current 03/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1M Prior:2-M Price (9/14/99).....:$21.38 P/E Ratio 03/00.....:16.4x Target Price..:$32.00 Prior:No Change P/E Ratio 03/01.....:10.2x Proj.5yr EPS Grth...:15.0% Return on Eqty 99...:21.4% Book Value/Shr(99)..:13.72 LT Debt-to-Capital(a)28.6% Dividend(00)........:$.20 Revenue (00)........:2717.00mil Yield...............:0.9% Shares Outstanding..:59.9mil Convertible.........:No Mkt. Capitalization.:1280.7mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ McDermott International has recently emerged from a comprehensive restructuring effort, dramatically improving the company's balance sheet, flexibility, and profitability. This effort, over a span of two years, has shifted the company's market position from being a high-cost producer to being a highly competitive international presence. Additionally, fundamentals have improved sharply this year for the company's primary business lines, marine construction and power generation. In recent weeks, MDR stock has heavily underperformed its marine construction peers, as well as the overall market. MDR stock has dropped 27% since early August, versus a 1% gain for the S&P 500 and an 11% increase in a peer group of marine construction stocks. Moreover, average trading volume has spiked sharply in the last two weeks. We believe this underperformance is not supported by fundamentals, which are generally on a positive trend. Last week, in meeting with MDR management, we learned of no incremental company news that detracts from our earnings forecast. Coincident with the recent stock price decline, however, is the building controversy surrounding the company's recently awarded Natuna pipeline installation project offshore Indonesia. Although we believe the risk of deferral, or even cancellation, remains, we anticipate this possibility is small, supported by recent comments from MDR management. Moreover, this contract only accounts for $0.05 per share, or 4%, of our fiscal 2000 EPS estimate of $1.30 per share, and just $0.10 per share, or 5%, of our new fiscal 2001 estimate of $2.10 per share. We have long viewed MDR as a relatively safe way to play the oilfield industry recovery, due to its diversification into other, less volatile businesses. However, we note that JRM's earnings leverage to improving oilfield activity is high. This division accounts for just 26% of our fiscal 2000 revenue forecast, and 19% of operating income, yet we forecast strong revenue and margin growth in fiscal 2001, increasing these numbers to 33% and 36%, respectively. In Power Generation, we project operating margins will increase in fiscal 2001 to 8.4%, from 7.0% in fiscal 2000, based primarily on higher profitability from the international service markets, as wells as a modest demand recovery in Southeast Asia. Our outlook for both Industrial and Government opera tions calls for stable revenues and flat-to-slightly higher margins, yet note that the company recently targeted growth in Government services, as validated by a recent major contract with Bechtel. Putting this all into perspective, since early calendar 1999, the prospects for both Marine Construction (due to higher oil prices) and Power Generation (due to improving economies in Southeast Asia) have both increased markedly, yet MDR stock has significantly underperformed peers. Furthermore, backlog increased sequentially during the June quarter for the first quarter since March 1997, from $2.57 billion to $2.77 billion. Thus, we believe the company's earnings prospects have improved significantly, and that J. Ray McDermott's earnings leverage is not currently factored into the stock. Combining the power generation, industrial, and government businesses, MDR has approximately two-thirds of its business in stable, if not growing operations. The remaining segment, marine construction, has strong earnings leverage to an anticipated oilfield recovery, in our opinion. Going forward, the company intends to pursue a overall growth strategy, both internally and through acquisitions, for the first time in many years. We view this as a positive development, verifying the conclusion of the defensive restructuring focus. As discussed in our August 13 report, we believe McDermott is a safe way to play the oilfield recovery. Currently, MDR is trading at just 10.4x our new fiscal 2001 EPS estimate of $2.10 (raised from $1.75), compared to a peer group average of 17.0x, 5.7x our new fiscal 2001 CFPS estimate of $3.82, versus 8.8x for the peer group, and just 3.1x our EV/Estimated fiscal 2001 EBITDA, versus a peer group average of 8.0x. Based on this steep valuation discount, the successful completion of a two-year restructuring program, a net debt-free balance sheet, and improving business fundamentals for both marine construction and power generation, we believe the risk/reward balance of MDR stock has improved markedly. Consequently, we are raising our investment rating on MDR shares to 1M from 2M, and maintaining our price target of $32 per share. |
