National Oilwell Varco (NOV) reported earnings on Friday that beat expectations. Despite the outstanding earnings report, shares are down more than 4% Friday. The company has a virtual monopoly on rig technology and they are in a good position for growth because of their dominance. Jim Cramer said the following about National Oilwell Varco on the lightning round segment of his show last week. "People think it will have a bad quarter next week. If that happens, buy, buy, buy. They have the best rig technology." Since the stock reported a great quarter and is down, now is the perfect time to buy, buy, buy.
National Oilwell Varco CEO Merrill Miller announced in the Q4 2012 conference call that they earned record revenues and profits last year. The EPS (excluding transaction costs) for Q4 came in at $1.49, which is a 9% increase from a year ago. Quarterly revenue was also impressive and it jumped 33.5% from 4,259.0 million to 5,685.0 million. Revenue has drastically increased since the financial crisis as shown in the graph below. The company's EPS in 2012 increased 24% from 2011. In addition to these impressive figures, the company announced new capital equipment orders of 2.42 billion, which is a 1:1 book to bill ratio. National Oilwell Varco acquired numerous new companies in 2012. In total the company spent 2.9 billion on 17 transactions and they expect to close the acquisition of Robbins & Meyers in just a few weeks.
Despite the phenomenal growth National Oilwell Varco has experienced over the past few years, some believe that the company's growth prospects for the future aren't that bright. The company did announce in their Q4 conference call that demand for the rigs in the North American land market is very weak. Clay Williams, COO of the company, said that the North American land market has been sliding since in the summer of 2012 and the conditions continue to persist. However, National Oilwell Varco's growth story is not over despite weak demand from the North American land market. The company believes that international land markets are far more promising. Also, many international markets are retooling much like their North American counterparts did several years ago to more high tech drilling assets.
Demand for offshore rigs and equipment is strong, despite weak demand from the North American market. Many Wall Street analysts believe that orders for deepwater rigs are slowing, but Varco claims that this is not the case. The company states that after-tax returns for new rig construction projects are in the high teens. Also, the risk of cost of overruns and late deliveries for Varco is now near zero. The company also said in their conference call that 2012 saw a record number of deepwater field discoveries. The company asserts that high oil prices will continue to lure cause companies to pursue new deepwater drilling projects and it will need Varco's rigs if they are to accomplish this.
It is now the perfect time to buy National Oilwell Varco because of Friday's dip and the company's phenomenal Q4 2012 performance. 2012 was a record year for the company and it is in a good position to perform well in 2013. Numerous well known investors such as T. Boone Pickens and Warren Buffet are bullish about the company's future prospects. Pickens believes that the company is in a good position to benefit from higher natural gas prices. The major downside to this stock is the lack of growth in the North American land market. However, the company is still growing in every other part of the world, which will help to offset the weak growth in the North American land market. The stock's P/E ratio is lower than the industry average of 18 and the forward P/E ratio is less than the TTM P/E ratio. Also, the stock has a PEG ratio of .8 could indicate that the stock is undervalued. The stock has great growth prospects and it was unnecessarily sold off Friday.
Sources: the information and data in this article came from the company's Q4 2012 conference call and Yahoo! Finance
Source: chart from Y Charts
Disclosure: I am long NOV.