Why Larry Robbins Recommends National-Oilwell Varco Inc. (NOV)

As the Delivering Alpha Conference develops, and hedge fund managers, including Michael Novogratz of Fortress Investment Group, Omega Advisors’ Leon Cooperman, and his former protégée, Glenview Capital Management’s Larry Robbins, continue to pitch investment ideas. One that interested this author in particular was Robbins’ recommendation of National-Oilwell Varco, Inc. (NYSE:NOV), a company that is “flush with cash” –check out seven other stocks that he recommended today.

Let’s take a closer look at this $36.6 billion market cap provider of equipment and components used in oil and gas drilling and production operations; oilfield services; and supply chain integration services for the upstream oil and gas industry. Some fundamental analysis could help us elucidate the reasons behind Robbins’ new endorsement.

GLENVIEW CAPITAL

For starters, Mr. Robbins explained, there is one factor that his picks have in common: they are companies that have either levered up (taken debt at very low interest rates) to increase their money availability for shareholder friendly activities, or have the ability to do so.

However, there is more to his investment thesis than this. Investment is all about timing, and this seems like a good time to buy National-Oilwell Varco, Inc. (NYSE:NOV). While its stock trades at barely 15 times the company’s earnings, at a wide discount in relation to its industry peers, its growth potential look pretty compelling. In accordance with Credit Suisse analysts, National-Oilwell Varco “is an excellent company that will build most of the capital equipment for the industry in its areas of business” (Credit Suisse). In addition, a 2.2% dividend yield will make your wait worthwhile; moreover, a low payout ratio leaves plenty of room for dividend hikes.

Another element that bodes well for this energy company’s future is the recent spinoff of its Distribution segment into a separate publicly traded company: NOW Inc (NYSE:DNOW). This initiative should help National-Oilwell Varco, Inc. (NYSE:NOV) retrieve higher operating margins on a consolidated basis, mainly because this segment boasts the narrowest margins amongst its three businesses, as well as return cash to shareholders and “get a higher valuation and rid the conglomerate discount for the distribution business” (Credit Suisse).

National-Oilwell Varco, Inc. (NYSE:NOV), is up almost 2% in Wednesday trading, following Robbins’ “certification;” and he expects this uptrend to continue throughout the next year. Other major hedge funds betting on this stock are Harris Associates, run by Natixis Global Asset Management, which owns 21.3 million shares, and Warren Buffett’s Berkshire Hathaway, with 8.88 million shares.

Disclosure: Javier Hasse holds no position in any stocks or funds mentioned

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