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Assessing the New Boss at National Oilwell Varco

March 31, 2014 | About:

Nothing raises more fear or hopes in a business than change in management. The questions are always the same, will the new CEO shift the company’s direction? Does the change mean the business was not doing well before? Can overall performance improve? How will the market and shareholders react to the news? What about prospect investors? The truth is that there is no certain answer to the many inquiries a change in management raises. However, an assessment can be made based on the firm’s previous performance and new management’s discourse. That is exactly what it will be looked upon throughout this analysis that concerns National Oilwell Varco (NOV). So far, gurus have shown great confidence on the company and completed important purchases throughout the last quarter of 2013.

Announced and Smooth Transition

Last March 25, National Oilwell Varco announced that Clay C. Williams has been appointed President and CEO of the company effective immediately. Mr. Williams will be taking over Merrill A. Miller Jr.’s post, who previously announced would step down as part of the planned spin-off of the distribution business.

Mr. Miller said: “I elected to step down early as Chief Executive Officer in order to smooth the transition.” While Mr. Williams highlighted the exiting CEO stating that “I look forward to building upon the traditions of diligence and excellence that have been created here.” Hence, no significant changes should be expected in the company’s business model for the short term. Moreover, the market reacted positively to the news as stock price rose almost $3.

Previously, National Oilwell Varco received the Samsung-Q Gold Mark Certificate, the highest quality award that Samsung gives to its suppliers. Furthermore, the firm has inaugurated a state-of-the-art drilling simulator at the University of Texas at Austin. The award and simulator are a confirmation of the smooth transition planned by management, one in which the business model stood firmly on its rails.

Steady Performance

Zacks has confirmed a “Neutral” recommendation for National Oilwell Varco, on the grounds that sees no obvious catalyst to significantly push the stock price higher. This is not to be taken as if the firm is not expected to growth. On the contrary, growth is expected at moderate levels due to a healthy backlog, strength in international operations, and recent Robbins & Myers acquisition. Most importantly, the spin-off of the distribution business will have a positive impact on overall performance.

Good news to National Oilwell Varco, however, is curbed by highly competitive markets and expected weak pricing. Additional difficulties are seen on declining prices for new equipment packages, greater exposure to the potentially weaker natural gas market through the acquisition of Grant Prideco, and high reliance on its ability to develop and acquire essential products and technologies. Moreover, the most important downside to an investment in the firm is daily volatility.

Currently trading at 14.3 times its trailing earnings, National Oilwell Varco’s stock carries a 39% discount to the industry average. While financial indicators remain strong during the last three years, debt has recently climbed to high levels due to acquisitions. Additionally, operating margin has declined for the third year in a row and net income sunk below the industry’s average.

While Frank Sands (Trades, Portfolio) and Warren Buffett did in fact increase their positions during 2013, they did so very carefully, taking advantage of the volatility of stock price. Moreover, the discount earlier mentioned is an evidence of the risk a prospect investment takes when purchasing the stock. Hence, the risks associated with this stock make it not suitable for a prospective investor thinking on a long-term basis, even when management changes represent a continuity of the business model.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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