McDermott International (MDR): Traders Could Make a Double-Digit Profit on This $7 Turnaround Play

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.

If these changes yield the net result of improving cash flow in 2014 and 2015, look for investors to focus on what has become a deep value play. The company’s market value of $1.8 billion is not far above tangible book value of $1.7 billion. And the company still carries roughly $400 million in net cash on its books.

As a solid vote of confidence, CEO Johnson recently plunked down $500,000 of his own money to buy the beaten-down shares.

I don’t expect this stock to move back up into the mid-$20s, where it stood in early 2011. Not if management intends to shrink the company a bit in order to grow stronger. Still, a move up to $12, which would reflect a 2014 price-to-sales multiple of around 0.75, is quite reasonable. That’s a fair price to pay for a company with broken but fixable problems that still faces a sizable market opportunity as offshore energy exploration trends continue to strengthen.

Recommended Trade Setup:

— Buy MDR at prices up to $8.60
— Set stop-loss at $6
— Set initial price target at $12 for a potential 40% gain in six months.

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