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Summary

  • National Oilwell Varco is up 8.88% in the last month and NOW Inc. is up 17.27% since being publicly traded.
  • The stock is inexpensive on 2015 earnings estimates.
  • The company offers a low dividend yield but the payout ratio is also low, leaving lots of room for dividend growth.

The last time I wrote about National Oilwell Varco, Inc. (NYSE:NOV) I stated, "Due to the overbought technicals, fair valuation on next year's earnings growth potential, and small dividend yield, I will not be pulling the trigger on this name right now but definitely will be on any pullback." Since writing the article, the stock has increased 8.88% versus the 2.31% gain the S&P 500 (NYSEARCA:SPY) posted. I think it's safe to say that I missed out on a great opportunity. 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 April 28 the company reported first-quarter earnings of $1.40 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 15.55% excluding dividends (up 17.12% including dividends) and the spin-off of NOW Inc (NYSE:DNOW) and is losing to the S&P 500, which has gained 21.67% in the same time frame. Since initiating my position back on November 19, 2013, I'm up 11.32% inclusive of reinvested dividends, the spin-off, and dollar cost averaging. 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 right now is a good time to purchase more of the stock for the basic materials section of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 14.72, 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 12.28 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.76 per share and I'd consider the stock inexpensive until about $101. The 1-year PEG ratio (1.21), 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 12.16%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 12.16%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 12.5%. Below is a comparison table of the fundamental metrics for the company 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

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

05May14

79.88

5.04

11.64

6.86

103

0.42

12.14

05Jun14

76.25

13.52

11.08

6.88

103

1.08

12.47

06Jul14

83.02

14.72

12.28

6.76

101

1.21

12.16

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 2.22% with a payout ratio of 33% of trailing 12-month earnings while sporting return on assets, equity and investment values of 7%, 11% 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 2.22% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 6 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

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

05May14

1.30

7

19.6

31.1

9.5

05Jun14

2.41

33

7.0

11.0

9.5

06Jul14

2.22

33

7.0

11.0

9.5

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a current value of 79. 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 flattening in height, indicating the bullish momentum may be getting tired. As for the stock price itself ($83.02), I'm looking at $85.61 to act as resistance, and $79.49 to act as support for a risk/reward ratio, which plays out to be -4.25% to 3.12%.

Separation Of Oil And Power

It has been about a month and a half since Varco spun off its power distribution system NOW Inc. into an independent publicly traded company and you're probably wondering which part of the business you want to sell. The way I play this sort of spin off situations is that I keep the spin off as a call option, for as long as I will live. I don't contribute any additional money to it, and just let it live and breathe normally. What I actually do is invest in the parent company, and it has worked out pretty well for me so far. Varco is an excellent company which I don't plan on selling for a while and NOW is a call option which has been increasing in value (up 17.27%) since it first started trading on the New York Stock Exchange.

Conclusion

There is no doubt the stock has made an enormous move upwards since the separation of NOW and I believe it can continue to move up if the entire market continues to move up. The move definitely looks to be getting tired right now. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but fairly valued on growth expectations while next year's earnings estimates have started to decrease. In addition, the company has great near- and long-term earnings growth potential. Financially, the dividend is a bit small and the payout ratio is low with respect to earnings, leaving lots of room for dividend growth potential. On a technical basis the risk/reward ratio is about equal, but I think it will continue to move up before it moves down. I like the stock, but am not going to be purchasing a batch right now because I want to see if the downward revision of next year's earnings estimates is not a trend.

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 0.52%, while Eaton is up 8.63% and the S&P 500 is up 10.82%. The results appear to be deceiving because the sharp correction to Varco in June was due to the spin-off of the distribution business, and as noted earlier I'm up 11.32% on the investment.

(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!

Source: National Oilwell Varco Has Roared After The Spin-Off