Summary
National Oilwell Varco (NOV), designs, manufactures and sells equipment that is utilized in the oil and gas industry. NOV operates out of four divisions: rig systems, rig aftermath, wellbore technologies, and completion & production solutions. NOV's 52 week high and low are 86.55/46.08 respectively. Currently the stock is trading around ~$49.00.
Five Year Overview
2011 | 2012 | 2013 | 2014 | 2015 | |
Total Revenue | 14,658 | 17,194 | 19,221 | 21,440 | 21,371 |
Growth Over Prior Period | 20.6% | 17.3% | 11.8% | 11.5% | 8.3% |
Gross Profit | 4,497 | 5,043 | 5,104 | 5,809 | 5,696 |
Margin % | 30.7% | 29.3% | 26.6% | 27.1% | 26.7% |
EBITDA | 3,492 | 4,005 | 3,937 | 4,495 | 4,265 |
Margin % | 23.8% | 23.3% | 20.5% | 21.0% | 20.0% |
EBIT | 2,937 | 3,389 | 3,199 | 3,717 | 3,488 |
Margin % | 20.0% | 19.7% | 16.6% | 17.3% | 16.3% |
Earning From Cont. Ops. | 1,994 | 2,375 | 2,181 | 2,455 | 2,220 |
Margin % | 13.5% | 13.8% | 11.3% | 11.5% | 10.4% |
Net Income | 1,994 | 2,491 | 2,327 | 2,502 | 2,223 |
Margin % | 13.6% | 14.5% | 12.1% | 11.7% | 10.4% |
Diluted EPS | 4.70 | 5.58 | 5.09 | 5.70 | 5.21 |
Growth Over Prior Year | 18.1% | 18.7% | (8.8%) | 12.0% | (1.6%) |
(In millions expect for per share items)
In the past five years NOV has grown at a spectacular rate. Revenue, EBITDA, EBIT, earning from cont. ops, net income and diluted EPS have all rose to new highs. The top line has grown at a double digit rate (excluding 2015). Margins have been decreasing overtime at the expense of the top line, but they are still very impressive margins. One strategy that NOV has done in the past to increase margins is spin-off a less profitable division, Now Inc. (DNOW). DNOW's profit margins in 2014, 2013, 2012 and 2011 were 2.8%, 3.4%, 3.2% and 5.2% respectively. As one can see the spinning off of DNOW will produce higher margins for NOV going forward.
So why has NOV's stock fallen to new lows? Well first off the whole energy sector has been getting pounded from the price of crude oil plunging. Secondly expectations on the performance of the energy sector are very poor in the coming future. Finally earnings and revenue guidance for NOV have been cut. According to the consensus mean from June 16th, 2015, revenues, and diluted earnings are expected to fall 10.78% and 12.61% respectively in 2016.
Dividends and Profits
One way investors can profit from the fall in the price of NOV is buying the stock now and locking in a ~3.80% dividend. I know what you are thinking; is the dividend sustainable? To answer that question lets first look at the past history of the dividend and payout ratio.
2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |
Dividends | 1.64 | 0.91 | 0.49 | 0.45 | 0.41 | 0.10 |
Payout Ratio | 29% | 17% | 8% | 10% | 10% | 3% |
In 2014 the payout ratio was 29% of net income, meaning NOV paid out ~$725.58 (in millions) in dividends to shareholders. The current dividend is $1.84 per share (annually). The FY 2016 consensus mean net income is $1,037.17 (in millions). With cash in the bank of $3.02 billion and a current payout ratio of 35%, NOV has more than enough ample room to continue their current dividend payment.
Future Capital Gains
Will investors who buy NOV for the dividend also be able to lock in capital gains in the future? The answer lies in whether or not NOV's stock is for sale. Based on the P/E, P/B, and EV/EBITDA metrics, NOV is a very cheap equity buy. If you decide to go out and buy NOV tomorrow, ask yourself this key question. What will you do if the share price falls 20%? If your answer is to sell, I would advise to not buy NOV. There is going to be a lot of volatility in the next year or so due to the contraction of the oil and gas industry. NOV is a very strong, solid company that will come out of the contraction stronger than before. In the short term the price of its stock will be like a pendulum, swinging back and forth. My advice is to have a long term outlook on the company as a whole. Buy in small amounts, locking in the dividend, and continue to buy more stock as it continues to dip further into bear territory.
Price | Market Cap | Enterprise Value | P/E | P/B | EV/EBITDA |
49.09 | 19.04B | 20.18B | 9.38 | 1.01 | 4.73 |
Risks
The biggest risk that investors in the equity of NOV have is if crude oil plunges again. If the price of crude oil does fall in price, NOV will follow suit, as well as the rest of the energy sector. A second plunge will contract the industry even further, promoting C-Suite executives to cut jobs going forward. Recently, NOV has cut 1,500 Norwegian jobs. They plan on eliminating 900 permanent jobs and 600 contractors by the end of the year. NOV is doing the right thing, eliminating jobs that are not needed during this contraction. The threat of the further drop in the price of oil is still a black cloud that is hanging around the energy sector. Investors need to keep this former sentence in mind before making any investment decision.
If investors are buying NOV solely for the 3.80% dividend, and the dividend gets cut, what is left? This is like marrying someone solely for sex. The current dividend is sustainable, and if management decides to cut the dividend, the price of the equity will drop in price. A common stocks dividend is not a 100% guarantee. I am advising investors not to buy NOV just for the high dividend yield. Thus they should be buying NOV for the undervaluation of the equity and for long haul.
Conclusion
In the past year the price of NOV's equity has literally been slashed. Market expectations expect the energy sector to underperform in the next few years to come. Investors who have a long term focus will be able to pick up NOV's equity for cheap, locking in a 3.80% dividend yield. As with any investment, risks do exist. Buying for the long term is an investor's best bet. When the price dips, investors are advised to pick up more shares for even cheaper. Eventually the energy sector will recover. When the sector does recover, investors who buy NOV will realize capital gains.