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The last time I wrote about National Oilwell Varco, Inc. (NYSE:NOV) I stated that I would not be buying shares at that time. Since the last article it has lost 2.88% versus the 1.88% gain the S&P500 (NYSEARCA:SPY) posted. 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.

On October 25, 2013, the company reported third quarter earnings of $1.34 per share, which beat the consensus of analysts' estimates by $0.02. In the past year the company's stock is up 10.79% excluding dividends (up 11.68% including dividends) and is losing to the S&P 500, which has gained 24.57% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 14.56, 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 12.72 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.25 per share and I'd consider the stock inexpensive until about $94. The 1-year PEG ratio (0.88), 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 16.59%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 16.59%. Below is a comparison table of the fundamentals metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

05De13

81.85

14.99

13.03

6.28

94

0.87

17.14

06Jan14

79.49

14.56

12.72

6.25

94

0.88

16.59

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 1.31% 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 1.31% 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 5 years. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

05Dec13

1.27

19

7.0

11.2

10.8

06Jan14

1.31

19

7.0

11.2

10.8

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing from oversold territory with a upward trajectory and a value of 49.9. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line just crossed above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($79.49), I'm looking at the 50-day simple moving average to act as resistance (currently $80.69) and $76.54 to act as support for a risk/reward ratio which plays out to be -3.71% to 1.51%.

Recent News

  1. Barron recently published a report saying it saw about 30% upside for Varco. The article cites ramping orders for aftermarket parts and replacement orders for aging drill fleets as well as cheap valuation with respect to 2014 earnings.
  2. Barclay's is bullish on oil services stocks and raises Varco's price target from $93 to $102.

Conclusion

Varco is the leading maker of oil-rig equipment with 60% market share and has been a laggard with respect to the broader market for the past couple of years. Fundamentally the company is inexpensively priced based on future earnings and on future growth potential although the estimated earnings potential for next year has dropped a bit. Financially it pays a low dividend yield, but has lots of room to grow it. Technically I see the stock moving higher based on the RSI and MACD charts. The company is inexpensive based on future earnings, has a high earnings growth rate, and has bullish technicals for the short-term; it is for these reasons I'm will be layering into my position here.

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, 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.

Source: National Oilwell Varco Has Great Dividend Growth Potential