Why National Oilwell Varco’s relative valuation is important

By

Oct. 28 2014, Updated 8:00 a.m. ET

Relative valuation

So far, we’ve looked at National Oilwell Varco’s (NOV) valuation metrics in isolation over the years.

In this part of the series, we’ll discuss where NOV stands compared to its ten closest peers in the industry.

NOV - P15

Growth

In terms of revenue growth over the trailing 12 months, NOV stands close to its peers. However, it severely lags in terms of one year estimates. It does exceed the broad markets’ sales growth.

Also, NOV’s trailing 12 months earnings per share (or EPS) growth is small compared to its peers. It was actually negative last year. Currently, its EPS growth is also  less than the broader market.

Profitability

The operating margin is a company’s ability to generate profits from operations. NOV’s operating margin shows the most encouraging sign yet. Its margins for the trailing 12 months and the year ahead are above its peers and the broader market.

However, at the earnings level—return on equity (or ROE)—it lags its peers and the broader market. However, it isn’t behind by a very wide margin.

Also, its relatively lower ROE is likely due to lower use of debt in its business. Debt as a complimentary source of capital can help boost a company’s ROE.

Debt ratios

As expected, NOV stands out because of its low debt. Even as NOV increased its debt in the last couple of years, its levels—compared to its peers and the broader market—are still low.

Valuation

Considering its slower growth and lower returns compared to its peers, we shouldn’t be surprised that NOV is trading at lower valuation multiples compared to its peers.

However, the multiples gap isn’t large enough to hazard a claim that it’s undervalued.

NOV is a mature company that has plenty of cash. It’s probably struggling with ideas of how to use the cash.

So, investors can expect increasing returns in terms of dividends and buybacks in the future. This is good! If the company starts growing at a stronger pace again, investors can also expect gains in its share price. This is a bonus.

Key peers and exchange-traded funds (or ETFs)

NOV operates in the oil and gas service and equipment industry. It’s tracked by the VanEck Vectors Oil Services ETF (OIH). OIH counts NOV’s key peers—Cameron International (CAM), Halliburton (HAL), and Baker Hughes (BHI)—among its top five holdings.

Article continues below advertisement
Advertisement

More From Market Realist