National Oilwell Varco Remains Our Preferred Large-Cap Investment Idea, Says William Blair

In a research note published yesterday, William Blair analyst Brandon Dobell reaffirmed an Outperform rating on National Oilwell Varco (NOV) following second quarter earnings results, which were relatively in-line with Street expectations. No price target was assigned. 

Dobell wrote, “NOV remains our preferred large-cap investment idea in the energy services and equipment space, given what we believe is an underappreciated valuation that does not reflect structural returns on capital that are well above other large caps and most other companies in the group. Given investors are sufficiently nervous about rig system backlog and newbuild dynamics (and the related margin pressure that could exist if newbuilds were to slow dramatically), we believe the stock will continue to give investors opportunities to buy when fear is palpable and benefit from gradually increasing disclosure, free cash conversion, and capital allocation”.

The analyst added, “The more the management team details its expectations for jackups and floaters in 2014 and 2015 and the more detail investors get about other revenue drivers in rig systems, the more we believe the stock can work through the macro fears. We think the new segment detail provided by management will help the markets understand more specific drivers of revenue growth, whether backlog and order growth is sustainable, and how long demand will last for rigs, vessels, and offshore capital equipment, as well as more accurate commentary on margins. The opportunity for M&A, share repurchases, a more-efficient cash flow and tax structure, among other things, are aspects of the investment thesis that we believe will help support the multiple in the near term. For large-cap investors, we recommend positions in National Oilwell Varco, because we believe there is a path for the company to become 50% to 100% larger in the coming decade”.

The analyst concluded, “We view the valuation as attractive but not inexpensive, given the uncertainty around rig systems orders and backlog conversion dynamics, but we also believe investor expectations for a weak offshore rig market through 2017 are implied in numbers and the valuation at this point”.

According to, which measures analysts’ and bloggers’ success rate based on how their calls perform analyst Brandon Dobell has an 18.8% average return and a 53.3% success rate. Dobell is ranked #616 out of 3189 analysts.

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