5 Reasons to Buy This Buffett Pick
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a fund manager makes a position in a particular stock, instead of blindly copying his investment choice, it’s always wise to ascertain the reasons behind the pick, along with the time period of the investment. Warren Buffett, the world’s greatest investor added National Oilwell to his portfolio this year. The company provides a wide range of equipment and services to the oil and gas industry, operating in more than 900 locations in six continents. Here are a few reasons why equipment supplier National Oilwell (NYSE: NOV) appears to be a good investment option.
Oil and natural gas prices have risen significantly since their lows created this year, which have added to the profit margins of the oil and gas refiners. This has renewed the interest of oil and gas companies, in their expansion plans. With increasing Middle East tensions, and a rebounding Chinese manufacturing industry, analysts expect a further upside in crude and natural gas pricing, which in turn is expected to jump start the exploration and development of oil and gas. The equipment used in oil and gas exploration and development activities, experiences a lot of wear and tear, which brings National Oilwell into business.
National Oilwell recently announced that it would be acquiring one of its competitors, Robbins & Myers (NYSE: RBN) for $2.55 billion. Robbins and Myers, specializes in application critical systems and equipment parts like, valve controls and grinders which would complement National Oilwell’s product offerings. Robbins and Myers has a presence in 15 countries and recently reported quarterly revenues of $275.2 million, up 6.3% compared to the last year’s quarter. RBN has little to no debt and its net profit margin stands at 14.9%. According to my calculations, the ROI comes out to be 6.47%.
National Oilwell also acquired Wilson, a pipe and valve distribution business from Schlumberger (NYSE: SLB) for $906 million. Schlumberger acquired Wilson in 2010, when it carried out its $11.3 billion acquisition of Smith International. Analysts estimate the annual revenues of Wilson in FY2013 to be around $2.7 billion with a net profit margin of 4-5%, which could account to $108-$135 million in net income annually. This equates to an ROI of 11.9% to 14.9% per year, which is considered “good” in the industry as it has an interest free payback period of 5-6 years. However since Schlumberger is selling out Wilson, “so soon,” that rings a mild cautionary bell in my head.
National Oilwell was able to report record revenues of $5.3 billion, up 42% compared to the last year’s quarter. Diluted EPS stood at $1.43 which rose 14.4% from the last year’s quarter. The company ended the third quarter with $1.7 billion in cash and equivalents and the balance sheet includes total debt of $1.5 billion. Also the debt/equity ratio stands at a healthy 8% and overall the balance sheet looks solid.
It was released that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) holds 2.84 million shares of National Oilwell. Analysts expect National Oilwell’s earnings to grow at 16.8% over the longer term, which is a lucrative rate of return. According to the recent filings, Berkshire Hathaway has added industrial stocks to its portfolio, reducing its positions in retail and consumer stocks. This is indicates that Buffett is bullish on the industrial sector and that we can expect him to either hold or add to his holdings of National Oilwell.
The shares of National Oilwell trade at forward P/E multiples of 10.68x and 0.87x PEG. The stock yields 0.74% and the company pays out a meager 8.51%. The financial performance of the company was stellar, and with its planned acquisitions, National Oilwell appears solid for long term investors.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway 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!