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National Oilwell Varco Presents Itself As An Attractive Opportunity For Long Term Oriented Investors

|About: National Oilwell Varco, Inc. (NOV), Includes: DNOW
Summary

The current price plunge in National Oilwell Varco's equity, gives investors a great chance to buy a solid company.

The top line has been growing at double digit rates in the past five years.

Margins have been decreasing due to top line growth, but they are expected to improve due to the spinning off of Now Inc.

Investors will be able to lock in a 3.80% dividend at the current price.

Summary

National Oilwell Varco (NYSE: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. (NYSE: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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.