McDermott International Upgraded By KeyBanc After CBI Acquisition

McDermott International Inc MDR proposed in late 2017 to acquire Chicago Bridge & Iron Company N.V. CBI — a "well-timed" move, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Tahira Afzal upgraded McDermott International's stock rating from Sector Weight to Overweight with a new $14 price target.

The Thesis

After meeting with McDermott's management team, Afzal is now "incrementally comfortable" with the company's prospects and CBI's core portfolio projects, the analyst said in a note. (See Afzal's track record here.) 

For example, the Calpine power project does have some near-term risk, but management has done the necessary homework in assessing the risk with the expected cash flow and deleveraging, she said. 

The acquisition of CBI brings together McDermott's strong execution practices and international customer relationships with CBI's technologies, the analyst said. And the combined entity will be able to leverage their respective labor forces and fabrication/procurement supply chain as "compelling drivers" of margin recovery and market share gain, Afzal said. 

McDermott's stock is trading at a 7.1x EV/EBITDA multiple on the analyst's 2018 EBITDA estimate, which represents a discount to the E&C group average of 9.2x. A $14 price target is based on a blended 8.9x multiple on his 2019 pro-former EBITDA estimate of $1.14 billion for the combined company.

Price Action

Shares of McDermott International were trading higher by 12.80 percent at the time of publication Wednesday.

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