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

Summary

  • 2015 earnings estimates tell me the stock is inexpensive, but those estimates have been decreasing recently.
  • The company has lots of room to grow its dividend.
  • Though the company warned that sanctions against Russia may affect revenues, I don't believe it will affect them by much.

The last time I wrote about National Oilwell Varco, Inc. (NOV) I stated, "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." Since the article was published, the stock has decreased 0.96% versus the 1.95% 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 July 29, 2014, the company reported second quarter earnings of $1.61 per share, which beat the consensus of analysts' estimates by $0.17. In the past year, the company's stock is up 13.42% excluding dividends (up 14.99% including dividends) and the spin-off of NOW Inc. (NYSE:DNOW) and is losing to the S&P 500, which has gained 15.08% in the same timeframe. Since initiating my position back on November 19, 2013, I'm up 8.64% 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 to see if right now is a good time to purchase more for the basic materials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 14.15, 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 12.24 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.72 per share, and I'd consider the stock inexpensive until about $101. The 1-year PEG ratio (1.19), 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 11.85%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 11.85%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.1%. Below is a comparison table of the fundamental 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

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

13Aug14

82.22

14.15

12.24

6.72

101

1.19

11.85

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 2.24% with a payout ratio of 32% of trailing 12-month earnings while sporting return on assets, equity and investment values of 7.2%, 11.4% 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 2.24% 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 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

13Aug14

2.24

32

7.2

11.4

9.5

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 48.99. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height. As for the stock price itself ($82.22), I'm looking at $84.67 to act as resistance and $79.16 to act as support for a risk/reward ratio, which plays out to be -3.72% to 2.98%.

Russia Rules The Markets Right Now

It seems the market has been having mood swings of late when it relates to Russia. When a bad headline comes across the wire, the markets go down, when a decent headline comes up, the markets seem to follow. The West has been issuing sanctions against Russia, and they have been returning the favor with their own sanctions. Sanctions in the end will hurt companies on a financial basis and Varco is one of those companies which warned about the repercussions of sanctions. The company has stated that roughly 2% of its sales come from Russian operations and the sanctions can have an impact on results. I wouldn't be too upset with a 2% drop in earnings if the sanctions drag on for some time.

Conclusion

The company had a pretty good quarterly earnings report back in late July (which I reported on here) but moved down on the announcement. I personally said that I really like the earnings report and will be looking for opportunities to buy it. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but fairly valued earnings growth potential. The company has excellent near- and long-term earnings growth potential, but next year's earnings estimates have decreased. Financially, the dividend is small, but I believe it has much room to grow. The company has also grown its financial efficiency ratios in the past month. On a technical basis, the risk/reward ratio shows me a bit more risk right now, but the 50-day simple moving average has been acting as strong support. I still don't like that the average earnings estimate for 2015 have decreased again, so I'm going to practice patience and wait another month before making a purchase in the name.

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 November 19, 2013, Varco is down 1.47%, while Eaton is down 4.69% and the S&P 500 is up 8.65%. 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 8.64% on the investment. The swap-out trade has performed really well, but I'm equal with the overall market.

(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: The author is long NOV, DNOW, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Waiting Patiently To Pounce On Serial Dividend Increaser National Oilwell Varco