On Jul 11, 2013, we upgraded oilfield services behemoth National Oilwell Varco Inc. (NOV) to Neutral from Underperform. Our new investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Upgrade?
We like its healthy backlog, solid balance sheet and strength in international operations, particularly in the Middle East and Brazil. The Robbins & Myers acquisition will further boost NOV’s earnings visibility by expanding its blowout preventer product line; a critical safety machine for a well. The recent influx of offshore rig awards adds to the positive sentiment.
Detailed Analysis
Houston, TX-based NOV is one of the biggest manufacturers of drilling equipment in the world with an impressive business model. The company’s large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts and other expendable products.
NOV’s recently completed acquisition of smaller rival Robbins & Myers will allow the energy equipment contractor to broaden scale and scope of the solutions that it offers to oil and gas customers worldwide. In particular, the move will help NOV to strengthen its position as a supplier of blowout preventer (a critical safety machine that can shut a well off in case of an emergency), as Robbins & Myers is the fourth-largest maker of such devices.
Finally, NOV, which ranks ahead of Cameron International Corp. (CAM) as the biggest U.S. maker of oilfield equipment, has a strong balance sheet with a debt to capitalization ration of 17.3%. Moreover, since it commenced paying dividends in 2009, management has increased the payout every year. This indicates NOV’s healthy financial position.
However, we think the current valuation is fair and adequately reflects the company’s future growth prospects. Moreover, with markets remaining competitive and pricing likely to be weak, we see no obvious catalyst in NOV’s business to significantly push the stock price higher.
Stocks That Warrant a Look
While we expect NOV to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating units, one can look at Forum Energy Technologies Inc. (FET) and Dril-Quip Inc. (DRQ) as good buying opportunities. Both these oilfield machineries and equipment providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise considerably from current levels.
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