DA Davidson Upgrades McDermott (MDR) to Buy, Poor Margins Weigh on Earnings

DA Davidson upgraded shares of McDermott (NYSE: MDR) to a Buy rating from its previous rating of Neutral, but is lowering its price target from $24 to $22.

The company released its Q2 results with EPS of $0.27, well below the firms estimate of $0.31 and their Q2 2010 result of $0.35. Lower margins was the result and really offset substantial revenue growth.

An analyst at the firm comments, "Bookings in the recent quarter increased by 11 percent, and based on outstanding bids, are likely to increase further this year. With substantial fixed costs associated with fabrication yards and marine vessels, revenue growth can lead to substantial margin improvement, particularly as projects progress."

To incorporate lower margin assumptions and risks associated with timing of awards, the firm is reducing its 2011 and 2012 EPS estimates from $1.24 and $1.50 to $1.14 and $1.25. DA Davidson is also raising its 2011 revenue estimate from $3.5 billion to $3.62 billion and is lowering its 2012 estimate from $4 billion to $3.73 billion.

For more ratings news on McDermott click here and for the rating history of McDermott click here.

Shares of McDermott closed at $13.95 yesterday.

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