An Oilfield Services Stock That Warren Buffett Loves
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Do you want to invest into one oilfield services company that is loved by a lot of famous and successful investors, including Warren Buffett, Jim Simons and T. Boone Pickens?
Take a closer look at National Oilwell Varco (NYSE: NOV). As of December 2012, Berkshire Hathaway's Warren Buffett owned nearly 5.3 million shares, oil guru T. Boone Pickens held more than 94,000 shares while Renaissance Technologies' Jim Simons had nearly 2.3 million shares.
In the past year, shares of National Oilwell Varco has suffered a decline of more than 10%. Let’s dig deeper to see whether or not National Oilwell Varco is a good investment opportunity at its current price.
Incorporated in 1995, National Oilwell Varco is a leader in providing equipment and components to the oil/gas industry with operations in more than 1,160 locations around the world. It has three main business segments: rig technology, petroleum services and supplies, and distribution and transmission.
More than half of its 2012 revenue, or $10.1 billion, was generated from the rig technology segment. The petroleum services and supplies segment ranked second, with nearly $7 billion in revenue last year while the distribution and transmission division contributed more than $3.9 billion in sales.
In fiscal 2012, National Oilwell Varco had only one customer that accounted for 10% of its total revenue. It was Samsung Heavy Industries.
In terms of geographic areas, National Oilwell Varco derived the majority of its revenue, or $8.3 billion, in the U.S. South Korea ranked second with $3.1 billion in sales while Canada and Singapore contributed $1.3 billion and $1.1 billion, respectively, to last year's top line growth.
A 10-year historical fast growing performance
In the past decade, National Oilwell Varco has experienced huge growth in its top line and bottom line. Revenue increased tenfold from $2 billion in 2003 to more than $20 billion in 2012. Meanwhile, net income rose more than 30 times from $77 million to nearly $2.5 billion in the same period.
Moreover, the company has managed to generate consistent positive operating cash flow in the past 10 years, from $31 million in 2003 to nearly $2.15 billion in 2011. However, the operating cash flow was down to only $620 million in 2012.
Consistent dividend increases with a conservative payout ratio
What might also attract investors is its consistent rise in dividend paired with a conservative payout ratio. The dividend payment increased from $0.10 per share in 2009 to $0.49 per share in 2012.
The payout ratio, meanwhile, has been quite conservative, fluctuating in the range of 2.8% to 10.3% only. In 2012, National Oilwell Varco paid only 8.4% of its total profits in dividends. Interestingly, the company does not employ a lot of debt on its balance sheet. As of December 2012, National Oilwell Varco recorded $20.3 billion in total stockholders’ equity, $3.3 billion in cash and only $3.15 billion in long-term debt.
At $71 per share, National Oilwell Varco is worth nearly $30.3 billion in market capitalization. The market values the company at around 6.9 times EV/EBITDA.
Compared to its peers including Aker Solutions (NASDAQOTH: AKKVF) and Halliburton (NYSE: HAL), its valuation is average.
Aker is the smallest company of the group but has the most expensive valuation. At $19 per share, Aker has a total market cap of nearly $10.3 billion. It's valued quite expensively at 15.2 times EV/EBITDA. Halliburton, the biggest company among the three, has a total market cap of $37.6 billion. At $40 per share, Halliburton has the lowest valuation at only 6.33 times EV/EBITDA.
Of the trio, National Oilwell Varco generated the highest operating margin at around 17.8%. Halliburton ranked second with 15.6% operating margin. Aker's operating margin is the lowest at only nearly 7%. However, National Oilwell Varco delivered the lowest return on invested capital at 11.8% while Aker and Honeywell delivered 12.7% and 12.6%, respectively.
My Foolish take
National Oilwell Varco seems to be a decent pick at its current price considering its lofty operating margin, a reasonable valuation and a conservative payout ratio. In addition, investors would be impressed with its historical fast-growing operating performance.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Halliburton and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!