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Summary

  • The dividend payout ratio only stands at 19%.
  • The company is inexpensively valued based on next year's earnings.
  • The company is due for its spinoff in the next couple of months.

The last time I wrote about National Oilwell Varco, Inc. (NYSE:NOV), I stated:

Due to the technicals nearing a mid-term top, low dividend yield, and fair valuation with respect to earnings growth, I'm not going to pull the trigger on this particular name right now.

Since the time the article was published, the stock dropped 5.32% in the following ten days and has since then rebounded for a 0.93% gain versus the 0.64% drop the S&P 500 (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 January 31, 2014, the company reported fourth quarter earnings of $1.56 per share, which beat the consensus of analysts' estimates by $0.17. In the past year, the company's stock is up 16.77% excluding dividends (up 18.11%, including dividends), and is losing to the S&P 500, which has gained 20.07% 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 14.51, 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 11.31 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.98 per share, and I'd consider the stock inexpensive until about $105. The 1-year PEG ratio (1.05), 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 fairly priced based on a 1-year EPS growth rate of 13.77%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 13.77%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 12.43%. Below is a comparison table of the fundamentals metrics for the company when I wrote all articles pertaining to it.

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

06Feb14

74.17

13.41

11.98

6.18

93

0.86

15.53

06Mar14

78.23

14.41

11.22

6.97

105

1.05

13.68

06Apr14

78.96

14.51

11.31

6.98

105

1.05

13.77

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 1.32% with a payout ratio of 19% of trailing 12-month earnings while sporting return on assets, equity and investment values of 6.8%, 10.9% and 9.5%, 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 1.32% 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 National Oilwell Varco 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

06Feb14

1.40

19

7.0

11.0

8.7

06Mar14

1.33

19

6.8

10.9

9.4

06Apr14

1.32

19

6.8

10.9

9.5

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock is near overbought territory with a value of 65.85. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($78.96), I'm looking at $80.12 to act as resistance and $76.61 to act as support for a risk/reward ratio which plays out to be -2.98% to 1.47%.

Conclusion

Varco is experiencing something that probably a few companies are experiencing; the lack of expertise in the job market. The company realized this issue a few years back and has remedied the issue by opening a technical college. By opening this college, it shows that Varco has a lot of growth potential and should be a good holding for years to come. Fundamentally, the company is inexpensively valued on next year's earnings and fairly valued on next year's earnings growth potential while having great near and long-term earnings growth potential. Financially, the dividend is small and is well-supported by earnings. Technically, it appears the stock can experience downward momentum right again. Due to the toppy feeling, technicals, small dividend yield, and fair valuation based on next year's earnings growth potential, I will not be pulling the trigger on this name right now.

Because I swapped out Eaton Corp. plc (NYSE:ETN) for Varco in my dividend portfolio, it is only fair that I provide an update from the swap-out date. From 19Nov13, Varco is down 5.38% while Eaton is up 4.86% and the S&P 500 is up 4.11%. My change out is not doing too hot right now, but I'm playing this for the split. We'll take a look after the split and see what happens.

(click to enlarge)

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