Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)  

Summary

  • The company earned 17% more per share from last year at this time.
  • The stock spinoff of the distribution business will take place sometime at the end of May.
  • The stock is inexpensively valued based on 2015 earnings estimates.

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

"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." Since that article was published the stock is down 2.09% while the S&P 500 (NYSEARCA:SPY) is up 0.23%. 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.

The company reported earnings before the market opened on 28Apr14 and on the surface the results were mixed with the company reporting earnings of $1.40 per share (beating estimates by $0.01) on revenue of $5.78 billion (missing estimates by $20 million). The stock dropped a whopping 7.38% on the back of earnings. What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time and why it dropped so much on the back of earnings.

Segment Revenue

Segment Revenue (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Rig Technology

$ 3,009

$ 3,310

$ 2,628

-9%

14%

Petroleum Services & Supplies

$ 1,789

$ 1,925

$ 1,701

-7%

5%

Distribution & Transmission

$ 1,281

$ 1,253

$ 1,227

2%

4%

Eliminations

$ (302)

$ (316)

$ (249)

-4%

21%

Total

$ 5,777

$ 6,172

$ 5,307

-6%

9%

At first glance of the segment revenue we see that Rig Technology has increased 14% from last year. Rig Technology is the segment of the company responsible for providing oil drillers with drilling solutions and accounts for 52% of total revenues. Compared to last year total revenue has increased by 9%. Revenue out of backlog was $2.22 billion. The consecutive quarter drop in revenue is what may have contributed to the loss in share value after the report.

Income Statement

Income Statement

1Q14

4Q13

1Q13

Q/Q

Y/Y

Total Revenue

$ 5,777

$ 6,172

$ 5,307

-6%

9%

Gross profit

$ 1,400

$ 1,500

$ 1,287

-7%

9%

Gross profit margin

24%

24%

24%

0%

0%

Selling, general, and administrative

$ 520

$ 527

$ 471

-1%

10%

Other costs

$ 19

$ 16

$ 73

19%

-74%

Operating profit

$ 861

$ 957

$ 743

-10%

16%

Interest and financial costs

$ (26)

$ (27)

$ (28)

-4%

-7%

Interest income

$ 4

$ 4

$ 3

0%

33%

Equity income in unconsolidated affiliates

$ 10

$ 16

$ 19

-38%

-47%

Other income, net

$ -

$ (17)

$ (13)

-100%

-100%

Income before income taxes

$ 849

$ 933

$ 724

-9%

17%

Provision for income taxes

$ 260

$ 272

$ 224

-4%

16%

Net income

$ 589

$ 661

$ 500

-11%

18%

Net income attributable to noncontrolling interests

$ -

$ 3

$ (2)

-100%

-100%

Net income attributable to company

$ 589

$ 658

$ 502

-10%

17%

Avg. diluted outstanding shares

429

429

428

0%

0%

Earnings per diluted share

$ 1.37

$ 1.53

$ 1.17

-10%

17%

After scoping out a top line increase of 9% from the prior year let's take a look at the income statement to see how the bottom line fared. SG&A expenses increased 10% from last year and other costs decreased by 74%. Operating profits however managed to pull off a 16% increase from last year which already bodes well for the bottom line. Interest income increased 33%, equity income in unconsolidated affiliates decreased 47%, and other income was eliminated compared to last year but these values are miniscule with respect to the entire statement. All these led to an income before taxes increase of 17% over last year. However, when you make more money, you have to spend more in taxes and Varco spent 16% more in taxes compared to last year. Net income increased 18% from the prior year but net income attributable to the company was 17% which led to a 17% increase in earnings per share. The consecutive quarter drop in EPS is what may have contributed to the loss in share value after the report.

Balance Sheet

Balance Sheet

1Q14

4Q13

Q/Q

Cash and cash equivalents

$ 3,688

$ 3,436

7%

Receivables, net

$ 5,310

$ 4,896

8%

Inventories, net

$ 5,659

$ 5,603

1%

Costs in excess of billings

$ 1,520

$ 1,539

-1%

Deferred income taxes

$ 325

$ 373

-13%

Prepaid and other current assets

$ 709

$ 576

23%

Total current assets

$ 17,211

$ 16,423

5%

Property, plant and equipment, net

$ 3,437

$ 3,408

1%

Deferred income taxes

$ 479

$ 372

29%

Goodwill

$ 8,875

$ 9,049

-2%

Intangibles, net

$ 4,953

$ 5,055

-2%

Investment in unconsolidated affiliates

$ 402

$ 390

3%

Other assets

$ 123

$ 115

7%

Total assets

$ 35,480

$ 34,812

2%

Accounts payable

$ 1,391

$ 1,275

9%

Accrued liabilities

$ 2,717

$ 2,763

-2%

Billings in excess of costs

$ 2,079

$ 1,771

17%

Current portion of long-term debt and short-term borrowings

$ -

$ 1

-100%

Accrued income taxes

$ 484

$ 556

-13%

Deferred income taxes

$ 427

$ 312

37%

Total current liabilities

$ 7,098

$ 6,678

6%

Long-term debt

$ 3,149

$ 3,149

0%

Deferred income taxes

$ 2,088

$ 2,292

-9%

Other liabilities

$ 353

$ 363

-3%

Total liabilities

$ 12,688

$ 12,482

2%

Let's dissect the balance sheet now to see what was going on from last quarter. Deferred income taxes decreased by 13% from last quarter while prepaid and other current assets increased 23% helping total current assets increase 5% from last quarter. On the longer side of the asset equation deferred income taxes increased 29% helping total assets increase 2%.

Let's take a look at the liability side of the equation now. Billings in excess of costs increased 17% while the current portion of long-term debt was eliminated. Accrued income taxes decreased 13% and deferred income taxes increased 37% making total current liabilities increase 6%. When you factor in the long-term debt you get a 2% increase in overall liabilities.

Conclusion

The company reported earnings which were 17% higher than a year ago on 9% higher revenue while the share price was up 5.46% since the last earnings call excluding dividends. Revenues increased, earnings increased, and the balance sheet was status quo, so I have to conclude that it was something that was said on the call which didn't please investors. That was indeed the case, management forecasted a continued slowdown in orders for offshore rig equipment which as I stated earlier accounts for about 52% of revenues. They stated that backlog for new rig technology equipment should fall to $14 to $15 billion by year end. The share count has remained unchanged from the prior year. The results were great to me but guidance wasn't, and investors seem to think they weren't either as the stock dropped 7.38% after reporting while the S&P500 was up 0.32%. That being said, I think the stock is inexpensively valued and expectations have been re-set. With these results the stock is remains on my team and in the starting lineup.

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 Beats Earnings But Guides Lower

Check out Seeking Alpha’s new Earnings Center »