In this article, let's take a look at National Oilwell Varco, Inc. (NOV), a $30.43 billion market cap company that designs and manufactures drill rig equipment, provides downhole tools and services, and also provides supply chain integration services to the upstream oil and gas industry.
Market leader
On 2005, after the merger with Varco International, the company changed its name to National Oilwell Varco. The firm practically made every component that goes into a drilling rig, and also leads each product line in which it operates. We think this will remain in the future.
Strategies for expansion
In order to expand operations and gain more market share, the company focuses on drilling machinery and equipment, as well as making acquisitions. So far, there were more than 200, with some of them with a transformative characteristic; others were little ones concentrating in adding a product line or technology.
Those acquisitions were effective to create intangible assets like intellectual property and also high switching costs
Cash flow yield
At today's trading price, it has a free cash flow yield of about 9%, higher than most of the companies in the Oil & Gas Equipment & Services industry, and we believe this trend will continue in the future.
Commodity prices
Lower oil prices affect capital spending budgets, and this immediately affects drilled and rig orders. Apart from this, another risk that the firm faces is execution risk in several forms like paying more for acquisitions or the risk of mispricing orders.
Revenues, margins and profitability
Looking at profitability, revenues grew by 17.34% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.62 vs $1.40). During the past fiscal year, the company reported lower earnings of $5.16 versus $5.83 in the previous year. This year, Wall Street expects an improvement in earnings ($5.99 versus $5.16).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| NOV | National Oilwell Varco, Inc. | 11.72 |
| HAL | Halliburton Co | 24.18 |
| TS | Tenaris SA | 12.39 |
| Industry Median | 7.94 |
The company has a current ROE of 11.72% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Halliburton (HAL) and Tenaris (TS) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 12.1x, trading at a discount compared to an average of 18.5x for the industry. To use another metric, its price-to-book ratio of 1.42x indicates a premium versus the industry average of 1.34x while the price-to-sales ratio of 1.32x is above the industry average of 1.08x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
This industry could be hurt if prices are lower for a long time, but oil prices remain high and drilling activity continues to rise, which is a favorable scenario for National Oilwell.
The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Mario Gabelli (Trades, Portfolio), Larry Robbins (Trades, Portfolio) and George Soros (Trades, Portfolio) bought this stock in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
Also check out: Mario Gabelli Undervalued Stocks Mario Gabelli Top Growth Companies Mario Gabelli High Yield stocks, and Stocks that Mario Gabelli keeps buying Larry Robbins Undervalued Stocks Larry Robbins Top Growth Companies Larry Robbins High Yield stocks, and Stocks that Larry Robbins keeps buying George Soros Undervalued Stocks George Soros Top Growth Companies George Soros High Yield stocks, and Stocks that George Soros keeps buyingAbout the author:ovenerioWe provide independent fundamental research and hedge fund and insider trading focused investigation.| Currently 0.00/512345 Rating: 0.0/5 (0 votes) |
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