Morningstar | Slightly Lowering National Oilwell Varco's Fair Value Estimate on Reduced Near-Term Forecasts
We are slightly lowering our National Oilwell Varco fair value estimate to $34 per share from $36 due to a reduction in our near-term expectations for the company's profitability. Our no-moat rating remains in place.National Oilwell Varco finished 2018 strong, with revenue up 22% versus the year-ago quarter and adjusted operating margin reaching 4.5%. However, management has issued very negative guidance for early 2019. First-quarter revenue is expected to be down almost 20%, and operating margins are likely to be in the negative 1% to negative 2% range, the worst such posting in two years.
The cause of these weak expectations is primarily the U.S. shale activity slowdown, which is a temporary issue caused by pipeline bottlenecks set to be alleviated in the second half of 2019. Still, the magnitude of National Oilwell Varco's weakness is surprising, especially given that it derives only around one third of its revenue from U.S. land, overall.
At current share prices, however, the firm still looks attractively priced. We think the market is underrating the strength of international oil & gas capital expenditure recovery to come in the next several years, and this certainly manifests in a cheap valuation for National Oilwell Varco.
National Oilwell Varco is an independent provider of equipment and technology to the upstream oil and gas industry. The company's segments include: Wellbore Technologies, which designs, manufactures, rents, and sells a variety of equipment and technologies used to perform drilling operations; Completion and Production Solutions, which designs, manufactures, and sells equipment and technologies for hydraulic fracture stimulation, well intervention, onshore production, and offshore production; and Rig Technologies, which designs, manufactures and sells land rigs, offshore drilling equipment packages, and drilling rig components that mechanize and automate the drilling process and rig functionality.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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