In this article, let's take a look at National Oilwell Varco, Inc. (NOV), a $35.56 billion market cap company that designs and manufactures drill rig equipment, provides down hole tools and services, and well as supply chain integration services to the upstream oil and gas industry.
Operating Margin
After the merger with Varco International, the company changed its name to National Oilwell Varco. Revenues last year were about $22.9 billion with an operating income of $3.42 billion, and an operating margin of nearly 15%. The decline in the operating margin was the consequence of the acquisition of the former distribution segment from Schlumberger (SLB), which is a lower-margin business.
Specific Actions
The company plans to expand its position. Specific actions include the focus on higher capacity drilling machinery and equipment, as well as expanding its non-capital upstream products business. Further, the improvement of the information technology strategy will contribute to its future capacity. And we don´t have to forget that some acquisitions could also contribute with the goal.
Good Acquisitions
The company has a good deal´s history. More than 200 acquisitions endorse this. Some of them were transformative ones and others were multi-billion dollar businesses. The reason is quite simple - it is faster to acquire something than develop it internally.
Growth Drivers
Management is convinced about its several growth drivers. They are: deepwater drilling rigs, floating production systems, retooling the jackup rig fleet, and unconventional expansion. Despite some contraction in the deep-water demand, the company is a great player for deepwater projects.
Revenues, Margins and Profitability
Looking at profitability, revenue declined by 12.28%, but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.42 versus $1.15). The net income increased by 16.6% when compared to the same quarter one year prior, going to $619 million.
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 | NationalOilwell | 11.73 |
| OII | Oceaneering International | 18.38 |
| CLB | CoreLaboratories NV | 193.16 |
| HAL | Halliburton Co | 19.88 |
| BHI | Baker Hughes Inc | 7.04 |
| TS | Tenaris SA | 11.92 |
| Â | Industry Median | 8.09 |
The company has a current ROE of 11.73% 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, Oceaneering International (OII, Financial) and Halliburton Co. (HAL, Financial) could be the options. Core Laboratories has an extremely good ratio. 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 14.1x, trading at a discount compared to an average of 22.3x for the industry. To use another metric, its price-to-book ratio of 1.64x indicates a discount versus the industry average of 1.65x while the price-to-sales ratio of 1.51x is above the industry average of 1.31x.
As we can see in the next chart, the stock price has an upward trend in the five-year periodand shares rose by 28.04% over the last year.
Final Comment
As outlined in the article, the firm can improve its margin through specific actions. Also acquisitions are a very important move, and it has demonstrated a good ability to integrate multiple businesses in the past.
The PE relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like David Einhorn (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), David Dreman (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), James Barrow (Trades, Portfolio), David Rolfe (Trades, Portfolio), John Rogers (Trades, Portfolio), Tweedy Browne (Trades, Portfolio) and Frank Sands (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as PRIMECAP Management (Trades, Portfolio) and Dodge & Cox.
Disclosure: Omar Venerio holds no position in any stocks mentioned
