The Competition
National Oilwell Varco has acquired dozens of companies over the past few decades. Last year they purchased 17 businesses for almost $2.9 billion, not including the recent $2.5 billion purchase of Robbins and Myers. Still, there are companies that do successfully compete with National Oilwell Varco. One notable competitor is FMC Technologies, Inc. (NYSE:FTI). Although a big player in the oilfield services industry, over the past 5 years FMC Technologies, Inc. (NYSE:FTI) has had net profit margins that were 5.1% points lower than NOV. Additionally, NOV has on average generated from operating activities 5.84 times greater than FTI has over the past 4 years, while having a market cap only 2.34 times as large. With stronger margins and a cheaper valuation relative to operating cash flow I’d say NOV is the better investment out of these two.
And then there is Schlumberger Limited. (NYSE:SLB), the world’s largest oilfield services company. Schlumberger’s working capital amount is $11.788 billion, or roughly 17% more than NOV. That being said, if you bought Schlumberger Limited. (NYSE:SLB) you would pay $8.64 for each dollar of working capital. On the other hand, purchasing NOV would result in you only paying $2.65 per dollar of working capital. The conglomerate status of Schlumberger Limited. (NYSE:SLB) has given it a valuation that is much more expensive than National Oilwell Varco.
So, there we have it, two prominent competitors. One has margins preventing it from significantly disturbing National Oilwell Varco’s dominance. The other has margins that are neck and neck with those of NOV. However, in terms of valuation based on EPS or working capital amount, NOV is clearly the cheaper investment.
Final Foolish Thought
National Oilwell Varco’s business goes as the oil industry goes. High oil prices lead to more profits for oil producers. More profits for oil producers leads them to drill for more oil. Drilling for more oil results in demand for the products that only National Oilwell Varco, and a handful of its much smaller competitors, can provide. While the short term future of the oil industry is incredibly hard to foresee, oil will be drilled in the coming decades. The drilling of oil will necessitate the construction of rigs. Excellent managerial decisions over the past few decades have allowed National Oilwell Varco to establish themselves as the undisputed market leader. They have created a set of advantages for themselves that other companies will find impossible to duplicate. Margins created by decades of massive consolidation can barely be achieved by anyone else. Those companies who can compete with the margins of NOV have much more expensive valuations. A strong financial position and absolute dominance in supplying vitally important products to the oil production industry, one that will almost definitely exist in the foreseeable future, make National Oilwell Varco a company that is certainly worth owning a piece of.
The article 3 Reasons National Oilwell Varco is A Buy originally appeared on Fool.com and is written by Ryan Palmer.
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