Drill Baby Drill: A Rebound Story

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

National Oilwell Varco (NYSE: NOV) has seen better days. This stock is down around 20% in the last year and over 10% in the last 5 days. However, their business is stronger than ever. This company provides oil well services and equipment to the oil and gas industry. They recently reported earnings of $1.49 per share, beating the $1.44 estimate set by analysts. National Oilwell Varco reported revenue up 33.48% from the prior year, including a 16.37% increase in net income. Their 2012 earnings came in at $5.91 per share, which is the most the company has ever earned in a single year, up 24% from 2011.  All of this put together should cause a spike in the stock, right? Well, sometimes the market reacts differently.

In 2012, National Oilwell Varco acquired 17 companies, most notably Robbins & Myers (NYSE: RBN) for $2.5 billion. Robbins & Myers provide engineered equipment used in the energy, industrial, chemical, and pharmaceutical industries. This addition to their portfolio makes them more technologically advanced, as well as provides yet another revenue stream. Robbins & Myers has a trailing twelve months revenue of $1.05 billion. The continued acquisitions are a positive for the company, as it shows management is continually improving and acquiring in spaces where they need more technology.

I see acquisitions as a way for a company to utilize its free cash flow and cash on hand to increase revenue streams in order to return more value to investors. Companies like Apple and Microsoft who continually hoard cash are not companies I wish to invest in. I believe this will help them become a full service provider to oil and gas companies, and become a one-stop-shop to get resources out of the ground. The more National Oilwell Varco can provide to its customers the better. 

Currently, National Oilwell Varco is trading at just 11.2 times earnings. Two companies similar to this are Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI). To compare, these two companies are trading at multiples of 14.7 and 15.5, respectively. All of these are strong ratios compared to the industry average of 26.58. The chart below shows a comparison of the three's current price to earnings and forward price to earnings. As you can see, each of them are growing their earnings, which is a good sign for the industry. 

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Year to date, Halliburton is up over 14%, Baker Hughes is up over 7%, and National Oilwell Varco is down over 5%. The major under-performance is unwarranted, especially with Goldman Sachs' price target being set at $95 earlier this year. Usually an upgrade from a top firm like this one causes a spike in the stock. Halliburton and Baker Hughes should continue their runs up, with Halliburton being the top performer in the sector for the year. However, National Oilwell Varco is still the cheapest of the three, and for that matter they are the best buy right now.

Personally, I believe this stock will rise above $80 this year, based on 12.5 times this years' earnings expectations. A 12.5 multiple is still incredibly cheap, but the stock is not loved by the market right now, so this is the discount I am forced to give. If the earnings report had been taken as a huge positive and a buying opportunity, as it should have, a fair multiple would be more along the lines of 15. I have initiated an outperform on all three of these companies in CAPS. Halliburton and Baker Hughes are BUYS and National Oilwell Varco is a STRONG BUY.

JoeySolitro1 has a position in National Oilwell Varco. The Motley Fool recommends Halliburton and 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!

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