National Oilwell Varco Is Still A Buy After Q1 Results

May.28.13 | About: National Oilwell (NOV)

On April 26, National Oilwell Varco (NYSE:NOV) reported earnings that fell short of Wall Street's expectations primarily due to lower operating margin in all of its segments. National Oilwell Varco, which provides equipment and components for the oil and gas industry, missed both EPS and revenue estimates. Despite the anemic quarter, National Oilwell Varco is still a buy because of the company's long term potential.

Fundamentals

The stock has strong fundamentals and it appears to be cheaper than its competitors. National Oilwell Varco's TTM P/E ratio of 12.18 is well below the industry average P/E ratio of 22. The forward P/E ratio is 10.35. The PEG ratio is .81, which could indicate that the company is undervalued. The company also recently increased its quarterly dividend payment by 100%. In addition National Oilwell Varco has increased its dividend payments since they began paying dividends in 2009. The Price to Book ratio for National Oilwell Varco is 1.44, which is below the industry average P/B ratio of 3.8. The 12 month growth rate for Varco is 36%. Also, the stock has the highest average 10 year EBITDA growth rate of 28.4%.

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North American Market

The North American market has been an underperforming market for National Oilwell Varco recently and the region will likely continue to cause National Oilwell Varco woes in the near term. The company remains very cautious about the North American market and the pricing and volumes remain an issue. U.S. rig counts drifted down another 3% recently and Canadian spending on consumables and production equipment declined. The well performing rig technology segment of National Oilwell Varco was not immune from the slowdown in North America either. Even high growth regions like the Permian Basin and Eagle Ford are becoming more challenging for the company because of competition.

International Markets

National Oilwell Varco has been primarily held back recently by choppiness in the North American market. However, National Oilwell Varco is doing a much better job internationally. The demand is up and the company is expanding in places such as Russia, Angola, and Brazil. Application of new technologies such as horizontal drilling will continue to fuel the company. The rig technologies segment of National Oilwell Varco's business is operating on a very busy schedule because of a surge in demand for offshore oil rigs. In addition, the company's shipments are expected to be up 83% year over year. Also, 92% of Varco's backlog is destined for international markets.

Conclusion

The results from National Oilwell Varco's first quarter were disappointing. However, the stock is still an attractive long term investment. The stock appears to be undervalued based on several key metrics. In addition, legendary value investor Warren Buffett has added to his position in Varco recently. The company will likely continue to underperform in North America in the near term and the international segment should continue to perform well in the short term. The company has a very large backlog and the stock is a bargain buy at current levels.

Disclosure: I am long NOV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.