National Oilwell Varco (NYSE:NOV) creates systems and products used in oil exploration and drilling. It is the biggest maker of oilfield equipment in the US. Ken Fisher’s Fisher Asset Management is a fan of NOV, as is Ken Heebner’s Capital Growth Management and Ken Griffin’s Citadel Investment Group.
In late October, NOV reported results that were better than analysts expected, reports Zacks. “Earnings per share (excluding transaction charges) came in at $1.26, comfortably above the Zacks Consensus Estimate of $1.17 and the year-ago adjusted profit of 97 cents. Quarterly revenue rose 24.2% year-over-year – from $3,011.0 million to $3,740.0 million – and was 2.4% above our projection.” This snapshot gives us an idea about NOV’s performance but we need to get an idea of the company’s value and its relative pricing before we can come to any conclusion about whether NOV is a good buy.
Not everyone is a pro when it comes to company valuation, but there are a few metrics anyone can use to get an approximation of a stock’s real value:
✓ The current price multiples
✓ The consistency of past earnings and cash flow
✓ The amount of growth expected
Let’s see what these numbers can tell us about NOV.
CURRENT PRICE MULTIPLES
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced.
Next, we will take a look at the company’s enterprise value to unlevered free cash flow. To get this metric, we will divide the company’s enterprise value (market cap plus debt minus cash) by its unlevered free cash flow (just free cash flow with interest payments added back in). The lower this number, the better. Like with the P/E ratio, if this number is too high it means the stock is likely overpriced.
There are two different camps of thought on this subject, each thinks the other multiple is more important, but they agree on one common aspect. The lower these multiples are the better.
To get some perspective on these numbers, let’s look at NOV’s P/E ratio and EV/FCF, as well as that of its nearest competitors – Baker Hughes (NYSE:BHI), Cameron International (NYSE:CAM) and FMC Technologies (NYSE:FTI). NOV has the lowest P/E ratio of the four, trading at 15.42 times its earnings. BHI is a little higher at 17.33 P/E ratio, while CAM is a little above that with a P/E ratio of 19.92. FTI has the highest P/E ratio at 26.58. NOV also has the lowest EV/FCF of the group. FTI and BHI are much higher, coming in at 52.53 and 69.84 respectively. CAM was the highest at 114.82.
An ideal investment has strong consistency in its earnings. It would have a small range for its free cash flow yield. Over the last five years, NOV’s free cash flow yield has ranged from 3.42% to 18.78%, averaging 8.01%. BHI has not fared so well. Its current free cash flow yield is just -3.76% as of November 1, it lowest in five years. BHI averaged a 0.01% loss in FCF yield after reaching a high of 3.15% in December 2008. It is has the lowest FCF yield of the companies we looked at. CAM has had a broad range in its free cash yield, going from a five-year low of -2.70% in September 2011 to a high of 15.98% in December 2008. CAM had an average 3.89% FCF yield over the last five years. FTI ranged from -0.58% to 7.29% for an average free cash flow yield of 3.34%. Now that we know where these stocks have been, let’s take a look at their expected growth.
Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. NOV’s earning grew 27.9% over the last five years, outpacing the industry’s 0.8% growth. NOV is expected to continue to outperform the industry. Analysts predict the NOV’s earnings will grow 18.0% over the next five years. The industry is expected to grow 17.9%. BHI‘s earnings shrank 3.6% over the last five years. Its earnings are expected to grow 23.0% in the next five years. CAM’s earnings grew 22% over the last five years. Its earnings are expected to grow 16% over the next five years. FTI is forecasted to perform comparably to CAM. FTI’s earnings grew 26% over the last five years and are expected to grow by 16% over the next five years.
THE BOTTOM LINE
We like NOV. It has a low EV/FCF, strong growth and excellent free cash flow. NOV is currently trading at $69.07 and is expected to rise to $89.75 within the next year. It also has a low P/E ratio, meaning that it is priced well. For the price though, investors may want to consider stocks like Apple (NASDAQ:AAPL) which is trading at a lower P/E ratio (14.37) and is expected to grow in price by more than 20% in the next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.