Time To Buy McDermott's Turnaround, Cowen & Co Says

In a report published Wednesday, Cowen & Co analyst Scott Kirkwood initiated coverage of McDermott International MDR with an Outperform rating and a target price of $7. McDermott is poised to return to profitability in 2016 with various corrective measures being taken by its new management team. "We expect EBITDA to grow by over 125% from 2014 to 2016, which we believe will help to change sentiment and drive outperformance. Vertically integrated offering helps drive new orders," analyst Scott Kirkwood mentioned. The company's product offering covers the entire life cycle of an offshore EPCI contract and includes both subsea production systems and subsea umbilicals, risers and flowlines. Such integrated offerings result in significant cost savings besides putting the company ahead of other contractors. In the report Cowen & Co noted, "1Q15 saw new orders of $697m, which represents an increase of 320% y/y and is more than the total inbound orders that MDR saw in the first 3 quarters of 2014 combined. We expect new orders to be broadly flat from here through 4Q16." McDermott's contracts in backlog and currently in loss positions were $406.7m following 1Q15 and are set to fall to $208.2m by yearend 2015 and to $46.6m by yearend 2016. The decline in contracts in loss position is expected to boost the company's EBITDA margins by 30bps in 2015 and 230 bps in 2016. "We believe that actions of new management (refinancing of balance sheet, streamlining of management, change in culture, and focus on cost savings) have positioned McDermott for a return to profitability," Kirkwood added.