National Oilwell Varco Inc. Quarterly Valuation – June 2014 $NOV

National_Oilwell_Varco_Logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how National Oilwell Varco (NOV) fares in the ModernGraham valuation model.

Company 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 May 2014, National Oilwell Varco Inc completed the spinoff to its stockholders of its distribution business as an independent public company, NOW Inc.

NOV Chart

NOV data by YCharts

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

Key Data:

Recent Price $80.37
MG Value $113.31
MG Opinion Undervalued
Value Based on 3% Growth $79.15
Value Based on 0% Growth $46.40
Market Implied Growth Rate 3.11%
Net Current Asset Value (NCAV) $10.33
PEmg 14.72
Current Ratio 2.42
PB Ratio 1.52

Balance Sheet – 3/31/2014

Current Assets $17,211,000,000
Current Liabilities $7,098,000,000
Total Debt $3,149,000,000
Total Assets $35,480,000,000
Intangible Assets $13,828,000,000
Total Liabilities $12,783,000,000
Outstanding Shares 428,850,000

Earnings Per Share

2014 (estimate) $5.85
2013 $5.44
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

Earnings Per Share – ModernGraham

2014 (estimate) $5.46
2013 $5.07
2012 $4.79
2011 $4.24
2010 $3.88
2009 $3.55

Dividend History

NOV Dividend Chart

NOV Dividend data by YCharts

Conclusion:

National Oilwell Varco is suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor’s only concern is with the short dividend history and the company passes all of the Enterprising Investor’s requirements.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Baker Hughes Inc. (BHI) and ModernGraham’s valuation of Schlumberger Ltd (SLB).  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.88 in 2010 to an estimated $5.46 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 3.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of National Oilwell Varco (NOV) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on National Oilwell Varco (NOV)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in National Oilwell Varco (NOV) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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