Is McDermott the Next General Dynamics?

Also, the strange face of The North Face, more Dell-head hoopla and more nonsense.
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While nobody was watching,

McDermott International

(MDR) - Get Report

was fixing itself.

Now that it's in better shape and flush with cash, investors

including Soros Fund Management

, which three weeks ago boosted its stake, are counting on CEO Roger Tetrault to do something soon to get the stock in sync with the company's fundamentals.

Tetrault, as a senior VP, helped fix part of

General Dynamics

(GD) - Get Report

, which became one of the

New York Stock Exchange's

best performing stocks for several years running. He joined McDermott in 1997, when it was suffering from years of flat sales, a big annual loss and, oh, yes, allegations of wrongdoing that included anticompetitive issues.

Tetrault immediately launched an investigation into the allegations and called in the authorities to deal with what he found.

Then -- this is crucial -- he changed McDermott's compensation program, requiring all officers to own stock valued at a multiple of their annual salaries. Tetrault's own base salary, according to McDermott's most recent proxy, was purposefully set "substantially lower than the median base salary for comparable chief executive officer positions."

The rest of his compensation, the proxy says, was placed "at risk" by being tied to the performance of McDermott's stock.

Which brings us to the crucial part: After doubling within six months after Tetrault was hired, the stock has lost half its value from its high.

One reason for the slump, of course, is that the entire oil services group has been out of favor. But McDermott also suffers from its checkered history. "Everyone looks at McDermott and sees the past," says one investor, who owns less than 5% of the company and preferred not to be named. "They don't realize it's a different company."

What's more, it's not an easy company to understand. While the biggest chunk of its sales come from building and supplying offshore oil platforms through

J. Ray McDermott

(JRM)

, another publicly traded company, it also supplies utilities through its

Babcock & Wilcox

subsidiary, and nuclear-submarine reactors through yet another subsidiary.

Tetrault, for his part, has been shedding money-losing operations and restructuring the balance sheet, resulting in a company that now has $800 million in net cash (gross cash minus debt) compared with $400 million in net debt when he arrived. Then, on Friday, in what McDermott investors considered a critical event, the J. Ray McDermott sub was scheduled to complete a tender offer for all of its own senior debt.

With that gone, and the balance sheet flush with cash, investors are now expecting Tetrault to make his next move. Based on their accounts of conversations with him (he was making the rounds in New York last week) he is likely to either buy back a big slug of McDermott's own stock, and/or engineer a tender offer for the rest of J. Ray McDermott, which is 65% owned by McDermott.

Either way, the investors say, he's got to do something with that cash. Gross cash at McDermott amounts to $1.4 billion, or about $24 per share, while the market value is $1.3 billion based on Friday's close of 22 1/4.

That's right, despite its size, McDermott trades for less than cash.

Tetrault couldn't be reached for comment on Friday, but one investor says the CEO originally told all investors that he was at McDermott on the three-to-five-year plan with the ultimate goal of eventually selling it. "That's his plan," the investor says.

And so far he has done everything he said he would do. Considering the risk involved in Tetrault's compensation package, the company's cash and its stock price, he has quite an incentive not to blow it.

Short Positions

  • Oh, no, not the auditors! Could hardly believe what I was reading when The North Face (TNFI) issued a press release Friday withdrawing a tender offer for itself. From the release: "The Company indicated that the reason for the withdrawal is that it is experiencing unexpected delays in preparing its audited financial statements for 1998, the resolution of which may also impact the Company's 1997 audited results." Impact on 1997? That's when I wrote a column in the SF Chron about North Face's then-swollen inventories and receivables. Industry sources at the time said the company had a history of stuffing the channel. Then-CEO William Simon (no, not that William Simon) blamed the problem on shipping problems and other issues. As the column pointed out at the time, however, Simon had a smudged history: he had filed for personal bankruptcy in 1994. And in 1993, Odyssey Holdings, which was run by Simon and North Face Chairman Marsden Cason, filed for Chapter 11 bankruptcy reorganization. Fast forward to today, and you (I) can't help but wonder if those swollen inventories and receivables, which have dogged the company repeatedly, have finally come back to haunt it. A spokeswoman declined comment on Friday.
  • Auditor anguish: Am I the only one who has noticed an increase in discrepancies and delays following this year's fourth-quarter audits? (Thanks Arthur Levitt and the gang at the SEC.)
  • Dell-head hoopla -- for the record: While some short-sellers believe Dell (DELL) - Get Report will be "the short of the century," as this column recently reported, Piper Jaffray's Ashok Kumar, who was first to notice that Dell's revenue growth was slowing, now believes the worst is over -- probably. He doesn't expect a first-quarter surprise (at least not yet) and expects the stock to bottom at around 70.
  • Send me to the woodshed: An item here last July raised serious question about Best Buy (BBY) - Get Report, and whether its swollen expenses would catch up with earnings. I'd say that judging by the 40 point rise (or near doubling) in the stock, the answer is NO. (Another not-so-shining moment in this column's history.)
  • Speaking of which: An item here last week regarding Blue Rhino (RINO) noted that Blue Rhino had fired its auditors PriceWaterhouseCoopers. The item said PWC had raised several issues with Blue Rhino. One, according to the item, had to do with the "useful life" of gas cylinders acquired by a company with close ties to PWC. Shouldn't that have been close ties to Blue Rhino? Yes, but you knew that.

Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.