Now Inc. (DNOW, Financial) reported Q4 earnings. Net loss is $2.33 per share mainly due to noncash charges of the goodwill impairment and deferred tax asset valuation allowance. On the operating basis, the net loss was about 25 cents per share.
Revenue declined 14% quarter over quarter. The outlook for 2016 is not rosy. The management is doing what it can to ride out the severe downturn. In 2015, Now reduced nonacquisition head count by 1,200 or 23% and closed or consolidated approximately 46 branches. Year to date in 2016, 200 head count has already been cut.
Meanwhile, the management continued to use the cash flow generated through reducing working capital to fund acquisitions. In 2015 Now added nearly 900 people through acquisitions. The balance sheet remained strong with a net debt of $18 million compared to $1.6 billion market cap. Working capital is about 35% of total revenue, and the goal is to reach 25%.
The management believes that at the current condition, the company is EBITDA break-even if global rig count stands at 2,100 to 2,200 vs today’s 1,900. If the rig count stays at this low level, they would adjust the operations further to reflect the reality. The chart below shows North America rig count. I do not have international rig count going back long enough. But the U.S. rig count should more or less make a good statement that the energy industry is currently at its lowest point since the 1990s.
In brief, things have been hard. But the mangement has been doing the right things and the balance sheet is strong. Fairholme Fund mentioned in its annual letter that Now and its major peer MRC Global (MRC, Financial) should merge to create a dominant energy distribution company with 50% market share in the U.S. This could be the reason why the two stocks have been performing strongly even though the earnings were as bad as we could expect.
Fairholme now owns about 7% of Now and 6% of MRC. It may have some influence on the board. A merger makes sense to me although I do not based my thesis on hope for corporate actions.
The bad downturn has thrown all earnings-based valuation matrix out of the window because Now is losing money. But Now has $9.02 per share working capital, $1.54 per share PP&E, less 18 cents per share net debt, for a tangible book value of about $10 per share. Full book vale is $13 per share. In 2015 when the rig count in the U.S. dropped more than 60%, the company had a net operating loss of $109 million or $1 a share. You could pick the price you would like to enter if you like the long term future of the company.
