National Oilwell Varco, Inc. (NOV) An In depth Analysis

National Oilwell Varco, Inc. (NOV)

Sector: Basic Materials

Industry: Oil & Gas Equipment Services

National Oilwell Varco, Inc. designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. The company operates through three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services.

www.mylantsmoneyblog.com

How well is the Company growing?

With every business we want to know if they are growing. Why would we put money into a business that is not growing? The best way to understand if a company is growing is to compare it to the industry as a whole. Since NOV is part of Oil & Gas Equipment Services, that is what we will compare it to. Over the last year, the industry as a whole lost money (40.70%) NOV faired a little better (32.60%) but we are not writing home about it. Although if we did have anything to say it is the performance we have seen over the last 5 years. Its sales have doubled the industry average over the last 5 years. The industry is at 17.26% while NOV did a nice boastful 40.55%. Not only had this, but its net income (after taxes over the same period) almost tripled the industry average. NOV- 66.38% Industry- 28.62% So they have done well over the long hall, quite well for their industry.

Our Conclusion- this company has grown well until recently! We give it a B-

How valuable is the Stock?

How does one know how valuable a stock is? Cash is King! If this is the case, NOV has what it takes to blossom as an investment. When we think about value we have to think about the potential growth. How much potential? Something called the price to sales ratio gives us the best indicator of this. The more money a company has coming in through sales compared to how much working capital it has speaks volume of its health. The lower the price/sales ratio, the healthier it is. If we compare NOV to its industry, we find a really nice possibility to sprout and grow. The industry comes in with an 2.59 ratio while NOV stands at 1.40. It screams; “I have what it takes to get bigger!” If we take seriously “Cash is King,” then the second most important thing we need to consider is how much money is flowing through this company as compared to its price. This is called the price to cash flow ratio. The closer the ratio gets to that magical “100” the less capability a company has. “100” means it can just pay its bills because the value of the company is equal to the amount of money coming in and no more. The industry stands at 13.10 while NOVC shows off much less, coming in at 9.10. We have an abundance of upside potential compared to the industry as a whole. Since we compare companies to their industry to define their health there are two more ratios that we consider. Each ratio is defined by how low it is. The lower the better value the company has. The price to earnings ratio (P/E Ratio) (12.10 to 22.70) and the price to book ratio also come in lower than the industry as a whole.

Our conclusion- this is still highly under valued! We give it an “A”

How profitable is the Company?

If a company has a good sales force and the money is flowing, that is a possible good sign for an investment. But alone, this is not good. What if a company brings in money but then spends it as fast as it brings it in? What if it costs them almost as much to make a sale as it does to sell? These are important things to think about and know if you are going to put your money into a company. To know things like this, I would ask the question: “How much money is left over from a sale after you pay all your costs to make that sale?” This is called the gross margin. Comparing the industry to NOV, the industry comes in at 28.80%, so for every dollar sold, 28.8 cents is left over. It costs the industry 71.2 cents to make one dollar. NOV gross margin is 29.8%. Okay, a little better but nothing to write home about. This means that it is costing NOV 70.2 cents to make a dollar. The only other question I would ask is: “How good is the company at controlling its costs?” This is sometimes referred to as the net profit margin. If we divide the net profit by net revenues we come up with a %. The higher the % the better at money management the company is. The industry’s net profit margin is 11.1%. So, for every dollar they make (after taxes) their REAL profit is 11.1 cents. NOV comes in close, but better at 11.60%! They are a bit more profitable than the industry as a whole. The 5 year margins also have NOV below on Gross but well above on Net Profit.

Our Conclusion- this company is profitable and doing better than the industry as a whole. We give it an “B+”

Can the Company Pay its Debts?

With the financial collapse in 2008 of the markets and all the companies that would have gone under because they could not pay off their debt, we like to know how strong a company is before we are willing to invest our money in it. “Here Today, Gone Tomorrow” is not something we think wise. We like NOV here. The first question we would ask any company is how much debt has you accumulated as compared to the amount of money and/or property you own? This is known as the debt/equity ratio. If a company has potential for growth it will have a lot more cash than it would debt. The industry ratio is .37 since this is below 1.00; this means that on a whole; companies in this field are not financing the majority of their assets through debt. This industry on a whole is low. NOV is even far lower than the industry; they pop up a very healthy .06 that is light years better than the average company they are compared to. Since oil is very volatile, I would want to know how well NOV can pay off its short-term debt obligations if it had to. I don’t ant to lose my investment because the company faults on its debt. This is called the current ratio. NOV falls just below the industry average. The Oil &Gas Equipment comes in at 2.40 while NOV comes in at 2.30. Higher is better, they are close. This may be more of a current sign that the industry as a whole has not faired well over he last year more than anything, but not the company’s debt problems at all. Since they own most of their assets and they are not in hock, we like them.

Our Conclusion- this company can handle its debts fairly well! We give it a “B”

How good is the Management team?

When I ask how good the team is that runs the company, I am interested in how well productivity happens. This can bee seen through how well a company moves the product it is selling and also how well the employees bring in money. So the first thing I want to ask myself is: “How productive are the employees?” This is called the revenue/employee ratio; it gauges the average income the work of an employee brings in. The higher the ratio, the more productivity the management team gets out of its employees. NOV does well here. The industry average is $306,138.00 while NOV comes in at $392,104.00 so they are doing very well here. Now we all know we need money. Selling is good, but how well do they collect money from customers to pay for the sales? This is known as the receivable/turnover ratio. It gives me an idea as to how well the management team uses the assets they have to bring in their receivables. The higher the ratio the more it shows that a company is either able to operate with cash, or is very efficient in extending credit and collecting debt. NOV is still higher than the industry here, coming in at 4.8 while the industry is 4.2. They are looking good. We would be concerned about one ratio though. How well do they turn over their inventory? Here they are not nearly as efficient as the Industry average. A higher ratio shows product moving and sales happening. A low ratio shows inventory stagnant. This means money is not flowing and if prices drop with all that inventory it could really hurt the company. The industry average is 9.0 while NOV comes in a lot lower at 2.4 we do not like this and it would be a concern for us.

Our Conclusion- this company’s management team does well but needs to be more efficient at moving inventory. We give it a C+       

Technical Analysis

Long Term Investing

NOV has had a recent history of moving sideways within a rather grand trading zone. Its point spread between the trading zone has easily been 8 points, that is about 18% of its value so be aware of this. Presently we would not invest long term in this stock. Its weekly chart has a clearly defined downward trend in place. It is very gradual, so we would not look for a long term investment based upon growing with this stock, it is to premature.

Short Term

We are going to have to watch this stock. For the last 6 months it has been moving in its very wide trading zone. So now short term we might have a play that could move us upward. Watch the Bollinger Bands. We have had a huge push through the bands, one way to determine its upward movement would be to watch & see if the next week, the stock moves up a bit. If it comes back down to the band and does not push through as far, this “double bottom” buy signal could give us a good indication that it will move up. The RSI, Stochastics, and Williams% are all giving us short term positive divergences. For this reason we may have a good short-term upward play in our near future.

Resistance- With a huge fall like we have had makes us want to redefine where we can now go. But we can see two clear areas of resistance that we can challenge as we may move up here soon (short term). The first significant point would be 41.85. This is quite a ways up compared to where it is now. The second is 43.10. This gives us a lot of potential for movement upward.  

Support- With a huge fall that was more reactionary than anything, we want to make sure we are not influenced by this but look for a solid point of support. The first major support area for NOV would be 38.0 this is defined in a large area dating back from August of 2009. From there we can drop quickly to 35.5 so it can drop quickly and sometimes does.

Opportunity

Long term we do not see the opportunity for growth investing yet. Possible collar plays, but we still have that mild bearish pattern in the weekly chart. So we are hesitant. Short-term, look for a possible Option spread, like a Bull Put Spread here in the next week. If the signals provide us with the play!

www.EmpoweredInvestingNow.com