National Oilwell Varco (NYSE:NOV) just released its first-quarter earnings report, and investors have to be pleased by the rate at which the company has benefited from greater demand. Although rivals like Cameron International (NYSE:CAM) have gotten the lion's share of the media coverage, National Oilwell has demonstrated qualities as a strong player in the energy equipment space. As management continues to balance concerns regarding oversupply -- which has caused customers to scale back on orders -- National Oilwell now looks poised to outperform its bigger rivals. And patient investors can certainly do well here.
Helped by (among other things) rising domestic and international demand, National Oilwell posted $1.40 in earnings per share, when excluding transaction costs. Although estimates had come down ahead of the earnings report, this was good for a 1-cent beat, even though earnings arrived down 3% year-over-year.
Revenue, on the other hand, was stronger than expected, jumping 9% year-over-year to $5.7 billion, topping last year's mark of $5.3 billion. Revenue beat estimates by more than 6%. Remarkably, National Oilwell has now averaged double-digit revenue growth in each of the past five quarters. During that span, the company has also benefited from expanding margins.
It seems the company's overall business operations has taken a drastic turn for the better, as oil producers are now rushing to build equipment and commence drilling projects. That said, details like revenue and gross margins are not the driving forces of this stock. Not unlike, say, the tech or financial sectors. What matters most in this industry is the volume of orders received. In that regard, National Oilwell continues to stand out from its peers, both on a relative and absolute basis.
Unlike Cameron, however, NOV didn't do so well from the standpoint of revenue. I say this knowing that revenue has often been considered a "secondary" metric. When combined with orders and margin performances, it paints a clear picture of not only market share gains, but also operational efficiency. Not to mention, these numbers shows that National Oilwell has established excellent pricing leverage.
Consider, on a segmental basis, the company posted a 15% year-over-year jump in rig technology revenue. This is while revenue out of backlog reached $2.2 billion, while posting a 14% year-over-year jump in operating profit to $635 million. Note that operating margin expanded to more than 21%, this is where demand looks even more impressive.
Not to be outdone, the company posted a better-than-5% year-over-year revenue increase in Petroleum Services & Supplies revenue, reaching $1.7 billion. Helped by strong growth in land drilling, management achieved operating margin of 18.2%. These positive comps have to remove fears about the company's long-term outlook, even amid the announcement that Merrill Miller Jr., the company's long-time CEO, will be stepping down once the company completes the spin-off of its distribution business.
The question, though, is to what extent National Oilwell can maintain this outperformance when compared to the likes of Weatherford International (NYSE:WFT) and General Electric (NYSE:GE). Although the company's strong backlog serves as some assurance of future revenue, management offered caution about its ability to service the increase demand. This is where General Electric and Cameron may have the advantage, given their infrastructure and larger capacity to support higher production.
Nevertheless, the good news is, worrying about "too much demand" is a problem every business would love to have. From my vantage point, it makes National Oilwell, which continues to grow margins, a worthwhile risk. With the stock trading around $77 per share, which is 9% from its 52-week high, I project fair value to reach $90 in the next 12 to 18 months. Note, $90 is the median target of the 27 analysts that cover the company, and is $13 shy of the highest target of $103.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.