It's pretty clear that folks are expecting big things from engineering and construction firm McDermott International (NYSE: MDR). The stock is up close to 200% over the past year and trades at a trailing EV/EBITDA valuation of more than 15 -- pretty heady numbers for a company in this sort of margin-sensitive, cyclical line of business. But as BP (NYSE: BP) reminded everybody today, if you don't spend the money on infrastructure, you ultimately pay the price one way or another.
Once again McDermott's results are complicated by the reintroduction of the power business. So while reported revenue more than doubled from last year, "apples to apples" growth was more like 10%. That's not to say that the company didn't produce real internal improvements. That like-for-like treatment still gives you roughly 59% operating income growth and 87% growth in the backlog.
Although the government business was a little sleepy this time out, the company's offshore construction and power business both look primed for more growth. Like Technip (NYSE: TKP) and Acergy, McDermott is seeing ample business prospects in the marine space, so much so that they can apparently choose to refuse business that doesn't meet their margin standards. Furthermore, the resulting spike in energy prices isn't apt to discourage folks from building the offshore platforms and pipelines needed to get energy from offshore drilling locations.
On the power front, everyone seems pretty much up to speed on the basics. There are a bunch of new generation projects on the books (and McDermott got part of the TXU (NYSE: TXU) expansion business), and a growing willingness to consider nuclear projects. And so although McDermott isn't going to win every deal (NRG (NYSE: NRG) apparently chose Hitachi (NYSE: HIT) for one of their nuke projects), there looks to be a lot of business to go around in coming months.
Certainly the stock's move over the past couple of years from the dregs of infamy is an acknowledgement of this improved operating environment. And relative to other players in the space like Fluor, Chicago Bridge & Iron (NYSE: CBI), and Foster Wheeler, the valuation doesn't seem out of line. Tread carefully, though, as there's nothing quite so frustrating as being right about a story but still making little or nothing from it as the stocks already were priced for success.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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