Breakup Story: National-Oilwell Varco Is Going To Be A Breakout

Dec. 5.13 | About: National Oilwell (NOV)

Parting ways with things is usually a difficult thing to do, whether it's a girlfriend, your first car, or even your favorite foods when starting a diet. Almost always subtracting that something from your life might end up being a good thing, because you end up learning that thing wasn't too good for you, allowing you to learn and grow from the experience and that's what I'm going to focus on, the growth potential of National-Oilwell Varco, Inc. (NYSE:NOV) in parting ways with one of its business units.

Within the past couple of years I have subscribed to this theory three times, the ConocoPhillips (COP), Abbott (ABT), and News Corp (NASDAQ:NWSA) breakups. In the Conoco breakup you got shares of Phillips 66 (PSX), Conoco retaining the upstream portions of the oil business and Phillips 66 keeping the downstream portions. From this breakup COP itself is up 34.31% (excluding dividends), but PSX is up 88.08% (also excluding dividends)! In the ABT scenario you received shares in Abbvie (ABBV), ABBV maintaining the legacy pharma business and ABT holding onto the nutritional/medical device segments. From this particular expedition ABBV is up 45.4% (excluding dividends) and ABT is up 16.57% (excluding dividends). Another example in the past year includes News Corp up 18.86% and its counterpart Twenty-First Century Fox Inc (NASDAQ:FOXA) up 11.94%. Taking a look at the table below shows massive gains in the portion of the company that spun off from the parent company when compared to the S&P500 (SPY). I haven't participated in any other breakup plays because I wasn't really interested in the other breakups.

Starting Date

Ticker

% Gain

S&P

02Jul13

FOXA

11.94%

11.38%

NWSA

18.86%

03Jan13

ABT

16.57%

23.05%

ABBV

45.4%

02May12

COP

34.31%

27.99%

PSX

88.08%

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I found a pretty cool site that I've been utilizing which shows all the upcoming spin-offs to try and pick up some other potential winners like the three examples above. One company I like is National-Oilwell Varco . National-Oilwell Varco provides equipment and components for oil and gas drilling and production; oilfield services; and supply chain integration services to the upstream oil and gas industry worldwide. I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to show why I bought shares of the company right now for the basic materials sector of my dividend portfolio.

In order to make space for this stock in my portfolio, I sold Eaton (NYSE:ETN) and will be comparing the two against each other on the metrics I follow. I know these two companies are completely different from each other, but I believe it will be a trade up. The purpose for switching out of a technology stock to basic materials stock is because I like to try and mimic the percentages of stocks in all the industries of the S&P 500 and in this quarter there were quite a few changes to the index which made me alter my mix.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 14.99, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 13.03 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.28 per share and I'd consider the stock inexpensive until about $94. The 1-year PEG ratio (0.87), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 17.14%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 17.14%. Below is a table of the fundamental metrics I look for in a company and shows how National-Oilwell Varco fairs against Eaton. All data is as of 04Dec13.

Ticker

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

NOV

81.85

14.99

13.03

6.28

94

0.87

17.14

ETN

70.30

20.86

14.41

4.88

73

1.13

18.35

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 1.27% with a payout ratio of 19% of trailing 12-month earnings while sporting return on assets, equity and investment values of 7%, 11.2% and 10.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.27% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past five years. Below is a table of the financial metrics I look for in a company and shows how National-Oilwell Varco fairs against Eaton. All data is as of 04Dec13.

Ticker

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

NOV

1.27

19

7.0

11.2

10.8

ETN

2.39

49

4.4

10.1

4.7

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Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock waffling around in middle-ground territory with a value of 50.84. To confirm that, I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is below the red line with the divergence bars increasing in height, indicating a bullish pattern is about to start. As for the stock price itself ($81.85), I'm looking at $83.94 to act as resistance and the 50-day simple moving average (currently at $80.81) to act as support to act as support for a risk/reward ratio, which plays out to be -1.27% to 2.55%.

Conclusion

These are two completely different types of companies. Fundamentally I believe both companies to be inexpensively valued based on future earnings with National-Oilwell Varco being a better value; on the other hand from a growth perspective Eaton is fairly valued while National-Oilwell Varco is inexpensive. Financially, I'm giving up quite a bit of dividend but I believe it is okay because I like the capital appreciation opportunity much better with National-Oilwell Varco. On a technical basis, National-Oilwell Varco is exhibiting bullish trends. Though I've already initiated my position in National-Oilwell Varco at the time of this writing, I will not be buying any more shares right here even though I like the longer-term price appreciation story. I will provide reports on how each is doing against each other as the future progresses.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long NOV, ABBV, ABT, FOX, NWSA, PSX, SPY. 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.