McDermott International (MDR), Petroleo Brasileiro Petrobras SA (ADR) (PBR): This $7 Turnaround Play Could Pop 40% In 6 Months

Page 1 of 2

Investing in turnaround stocks can be quite profitable if you follow one simple rule: Only focus on companies that have identified the source of their woes and have delineated clear and workable solutions to stabilize and rebuild operations.

For struggling global construction firm McDermott International (NYSE:MDR), the path to a turnaround has been spelled out for investors. Now it’s time to execute on that plan.

A quick glance at McDermott International (NYSE:MDR)’s business model suggests this company should be flourishing. It has deep expertise in the construction of massive offshore energy platforms. In recent years, major oil companies have waded deep into the Atlantic Ocean as they seek to replace the output of fast-depleting onshore oil fields. For example, the Lula oil field off the coast of Rio de Janerio might hold up to 8 billion barrels of oil and is currently being developed by Brazil’s Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).

But McDermott International (NYSE:MDR) has stumbled badly, thanks to a series of managerial missteps. Most notably, the company has been unable to complete contracts under budget, turning potentially profitable deals into money losers. That was the result of a decision to pursue deepwater projects, straying from its core competency of shallow-water projects.

Though McDermott International (NYSE:MDR) has been underperforming for quite some time — missing profit estimates in the final two quarters of 2012 and the first quarter of 2013 — the recently released second-quarter results were bad enough to send shares down roughly 20% in just one trading session.

That was enough to lead to a shake-up at the company. A raft of senior executives, many of whom had oversight of regional projects in Asia and elsewhere, has been replaced. The company expects to take roughly $50 million in restructuring expenses, which should “mark the peak of near-term charges,” according to analysts at UBS.

The company said it intends to revisit its past strengths. Referring to recent quarterly results on the second-quarter conference call, CEO Stephen Johnson said, “We found that our processes and procedures were somewhat inconsistently applied throughout the organization and that management needs to improve adherence to our proven processes and procedures,” adding that “more experienced and more skilled personnel are now being recruited, being trained and assigned to projects by our global operations management.”

More importantly, McDermott International (NYSE:MDR) has abandoned the practice of pursuing projects at any price to retain market share. Instead, the company said it plans to pursue new contracts that are priced to better reflect potential cost overruns. It will take 12 to 18 months for bad projects to roll off the books, but the move should lead to a rebound in profit margins.

According to Morgan Stanley, McDermott’s EBITDA margins (margins on earnings before interest, taxes, depreciation and amortization) slid from 19% in 2010 to 12% in 2012, and thanks to a dismal first half of 2013, are likely to be slightly negative this year. Notably, these analysts think that newer contracts with sounder pricing will help EBITDA margins rebound to 8% in 2014 and 9% in 2015.

Of course, the only way to ensure solid pricing is a willingness to cease pursuing market share. That’s why Morgan Stanley’s analysts also see the company’s order book falling from $4.8 billion in 2012 to just $3 billion this year and again in 2014. In effect, the company is willing to shrink to grow stronger.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!