ModernGraham Valuation: National Oilwell Varco, Inc. (NOV)

moneyCompany Profile (obtained from Google Finance): National Oilwell Varco, Inc. is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates through three segments. Its Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells. Its Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service drill pipe, tubing, casing, flowlines and other oilfield tubular goods. Its Distribution & Transmission segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations worldwide. In July 2012, its subsidiary, NOV Distribution Services ULC, acquired CE Franklin Ltd. In February 2013, National Oilwell Varco Inc acquired Robbins & Myers Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $104.40
MG Opinion Undervalued
Value Based on 3% Growth $72.65
Value Based on 0% Growth $42.59
Market Implied Growth Rate 3.51%
Net Current Asset Value (NCAV) $7.50
PEmg 15.52
Current Ratio 2.57
PB Ratio 1.54

Balance Sheet – 9/30/2013 

Current Assets $16,255,000,000
Current Liabilities $6,317,000,000
Total Debt $3,749,000,000
Total Assets $34,673,000,000
Intangible Assets $14,216,000,000
Total Liabilities $13,046,000,000
Outstanding Shares 427,720,000

Earnings Per Share

2013 (estimate) $5.25
2012 $5.83
2011 $4.70
2010 $3.98
2009 $3.52
2008 $4.90
2007 $3.76
2006 $1.93
2005 $0.91
2004 $0.64
2003 $0.45
2002 $0.41

Earnings Per Share – Modern Graham 

2013 (estimate) $5.01
2012 $4.79
2011 $4.24
2010 $3.88
2009 $3.55
2008 $3.19

Conclusion:

National Oilwell Varco is a very intriguing company, as it has passed every requirement of both the Defensive Investor and the Enterprising Investor, except for having a suitably long dividend history.  The company has proven to have stable earnings growth and has a very strong balance sheet.  In short, this company has outstanding fundamentals.  Defensive Investors and Enterprising Investors should proceed enthusiastically with further research, beginning with a review of ModernGraham’s Valuation of Baker Hughes Inc..  From a valuation standpoint, the company has grown EPSmg (normalized earnings) from $3.19 in 2008 to an estimated $5.01 for 2013, a solid level of growth.  The market currently implies a growth rate of only 3.51%, well below what has been seen historically.  As a result, the company would appear to be undervalued.

What do you think?  Do you agree that National Oilwell Varco is undervalued?  Is the company suitable for both Defensive Investors and Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in National Oilwell Varco (NOV) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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2 comments for “ModernGraham Valuation: National Oilwell Varco, Inc. (NOV)

  1. Leif Lindberg
    February 12, 2014 at 1:22 pm

    I am a Finnish value investor for the long run. I´d like to know if you have any retrospective study showing the results of investing your way. How have the defensive and enterprising stocks done in comparison with the index?

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