National-Oilwell Varco (NOV) Cutting EPS But Raising the PT - KLR Group

KLR Group analyst, Darren Gacicia, raised his PT on National-Oilwell Varco (NYSE: NOV) to $52 and believes investors place too high of an emphasis on the downturn in the offshore rig construction cycle. The consumables businesses drive NOV's earnings recovery with an increase in upstream activity while NOV’s strong balance sheet, FCF, and opportunities for accretive acquisitions, offer a good risk/reward. No change to Buy rating.

NOV focused the 1Q/16 release on earnings leverage from the consumables businesses within Wellbore (downhole tools, drill bits, drill pipe, solids control, etc) and C&P (well intervention, frac/stim equipment, composite tubulars, FPSO, etc) segments. Within our forecast, these segments grow from ~30% of EBITDA in 1Q/16 to ~60% of EBITDA in 4Q/18, as upstream activity recovers.

NOV offered nascent signs of recovery in the Wellbore segment, as US revenue per rig increased, market share grew (downhole tools, drilling, optimization), and quotations for downhole tool, completion, and workover equipment increased in 1Q/16. In addition, Completion & Production (C&P) saw an uptick in quotations for orders for pressure pumping equipment deliveries in 2H/16, as services providers begin to prepare for an upturn in activity.

Aftermarket may benefit a demand recovery for parts, service, repair, and maintenance needed to put rigs back to work. Given tremendous fixed cost operating leverage and a leaner organization, the segments offer potential for upside surprises in coming quarters.

The PT increases to $52 from $48 and implies a 11.4x multiple on the $4.55 mid-cycle EPS (5.6x EV/EBITDA).

For an analyst ratings summary and ratings history on National-Oilwell Varco click here. For more ratings news on National-Oilwell Varco click here.

Shares of National-Oilwell Varco closed at $33.10 yesterday.

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