NOV: National Oilwell Varco: Earnings Growth at a Discount

National Oilwell Varco, Inc. Ticker (NOV) is a leader and international provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to upstream oil and gas companies. Their business conducts operations in approx. 700 locations within 6 continents. The company is a direct beneficiary of high oil and gas prices due to increased capital expenditures by oil companies. An example of the increased demand for NOV's products and services is reflected in the increasing global rig count which went up 15% in 2005, 11% 2006, and 2% 2007. With Oil and gas prices continueing to increase and concerns about long-term supply-demand imbalances for energy, I expect NOV's business segments (Rig Technology, Petroleum Services & Supplies, and Distribution Services) to experience higher demand going forward. I also expect the company to capitalize on these trends as their historical track-record shows they are capable of doing. Their total order backlog has grown from $2.3 billion in 2005 to $9 billion in 2007. NOV has also showed improvements on a number of metrics. Over the last 3 years their Return on Assets (ROA%) has gone from 6.2% in 2005 to 12.7% in 2007. There Return on Equity (ROE%) has also more than doubled going from 10.5% in 2005 to 22.9% in 2007. Their diluted Earnings Per Share (EPS) was $3.76 in 2007 compared to $.91 in 2005 which yields a 3 year annualized growth rate of 78.2%. My bullish position on the stock is also strengthened by the company's recent acquisition of Grant Prideco, Inc. (GRP) and what I consider to be an attractive valuation. In regard to the acquisition GRP has growing international exposure and market leading positions in its product lines. For the valuation NOV does not look incredibly discounted with a P/E of 15.1 compared 15.1 for the industry and 18.7 for the S&P 500. The forward P/E is also pretty similar with 10.5 compared to 10.9 and 13.5 for the industry and S&P 500. NOV's discount status starts to become apparent when you consider their strong growth potential going forward. The company currently has a 5 year growth forecast of 33.5% which I believe is probable due to a strong order backlog, favorable energy markets, and a strong industry position with the close of the GRP acquisition in the 2nd quarter of 2008. This gives NOV a Price Earnings to Growth (PEG) ratio of .30. This is less than half that of the industry avg. of .70 and only a quarter of the S&P 500's 1.20 PEG. So to sum it all up I think what you have is a quality business in an industry that is positioned for growth, however their stock is trading at a steal of a price. Sources: National Oilwell Varco 2007 Annual Report Morningstar.com (Earnings Stats) Full Disclosure: I do not currently own any NOV shares in real money or virtual portfolios, but I plan to purchase them in my Updown portfolio and may trade the stock or invest long term in NOV with my real money account.