National-Oilwell Varco, Inc. (NOV): One Cheap Energy Stock to Buy

Page 1 of 2

I don’t own any stocks which are related to energy. The big oil companies are so big that growth is slow and valuations are often higher than I’d like to pay. They’re fine dividend stocks, but not exactly value stocks. On the other hand, small oil and gas exploration companies are often far too speculative for me to take seriously. But I realized recently that instead of looking at the companies that actually produce the oil and gas I should instead look at the companies which supply the equipment to do so.

It’s kind of like the PC market, where actual manufacturers of PCs saw their margins dry up as competition grew intense while companies like Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT) made a killing. In the energy business, National-Oilwell Varco, Inc. (NYSE:NOV) fills that role.

National-Oilwell Varco, Inc. (NYSE:NOV)

No other vendor

National-Oilwell Varco, Inc. (NYSE:NOV), both the company’s stock symbol and an acronym for its nickname “no other vendor”, maintains a dominant share in the global rig market. I won’t pretend that I know all that much about the details of oil rigs and their operation, but NOV sells just about everything involved.

NOV has increased it’s annual revenue by a factor of 10 since 2003, largely through an aggressive strategy of acquisitions. From 2008 through the first quarter of 2013 the company spent $9.6 billion in acquisitions, and during that time annual revenue increased from $13.4 billion to $20 billion. National-Oilwell Varco, Inc. (NYSE:NOV) acquires companies in order to expand its product line into new areas and regions, increasingly becoming a one-stop-shop for customers. In the first quarter of 2013 NOV completed a $2.5 billion acquisition of Robbins and Myer’s, the largest single acquisition in four years.

Where’s the debt?

It would be reasonable to assume that a company like National-Oilwell Varco, Inc. (NYSE:NOV) which spends so much on acquisitions would rack up an enormous amount of debt. Reasonable, but incorrect. Until the Robbins and Myer’s deal NOV had very little debt, and the most recent figure puts the total debt at $4.35 billion. The company has $2.84 billion in cash and investments, leaving $1.51 billion in net debt. Previous to the end of 2012 the company actually had a net cash position, but its latest acquisition required National-Oilwell Varco, Inc. (NYSE:NOV) to take on more debt.

The acquisitions of the past five years have been funded by the company’s strong cash flow. The average annual free cash flow over the past five years is $1.35 billion, although the 2012 number is negatively skewed by big changes in working capital. This means that the entire net debt position could nearly be eliminated in a with a single year’s free cash flow.

A look at profitability

The financial crisis caused a drop in revenue and a steep drop in earnings in 2009 as the total rig count fell amidst the recession. Both have recovered, though, with revenue growing by 36% in 2012 and EPS growing by 24%. For valuation purposes I like to look at owner earnings, which is a modification of the free cash flow which eliminates the items which have nothing to do with operational profit. Here are the owner earnings for the past five years:

Year Owner Earnings (billions USD) Owner Earnings/Share
2012 $2.59 $6.07
2011 $2.10 $4.95
2010 $2.04 $4.87
2009 $1.80 $4.32
2008 $2.06 $5.16

Even during the recession National-Oilwell Varco, Inc. (NYSE:NOV) made plenty of profit, and since then owner earnings have surpassed pre-recession highs.

How much is NOV worth?

With $3.53 per share in net debt and $6.07 per share in 2012 owner earnings the company currently trades at an adjusted P/OE ratio of about 12.2. Let’s lay out three growth scenarios and see how much NOV is worth in each one:

Slow growth – Owner earnings per share grow by 6% annually for the next 10 years and by 3% annually after that.

Fast growth – Owner earnings per share grow by 9% annually for the next 10 years and by 3% annually after that.

Faster growth – Owner earnings per share grow by 12% annually for the next 10 years and by 3% annually after that.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!