Last month, on January 18th, I initiated a position with National-Oilwell Varco, (NYSE: NOV). I purchased 30 shares at a per share cost basis of $61.85. As I mentioned in my last few posts, I believe the energy sector is on sale in 2015 and I love sales. I just purchased 25 more shares, doubling down on National-Oilwell Varco. Today’s purchase price was $52.33 per share, totaling $1,308.25. Doubling down has reduced my cost basis from $61.85 to $57.65. My Dividend Dreams Portfolio will see an increase of $46 dollars annually, taking my annual dividends from NOV to $101.20.
Why Double Down On National-Oilwell Varco?
The market is currently afraid of oil producers, lucky for me National-Oilwell Varco is not an oil producer. NOV is a key provider to oil producers, think everything you need to drill for oil. From a consumer staples perspective, they are the Wal-Mart or Target of oil production. Some refer to NOV as “No Other Vendor.” I like the sound of that :-). No other vendor means that oil producers are forced to work with NOV if they want to keep producing. Though oil production is on the decline, I see this as a temporary measure to turn the tide of per-barrel prices. Oil producers will still drill and drilling requires equipment, enter NOV.
On a side note, I am long on oil producers. This year I added positions with BHP Billiton, (NYSE: BBL), and Valero energy Corporation, (NYSE: VLO).
National-Oilwell Varco Fundamentals and Valuation
I believe that National-Oilwell Varco is a great addition to my portfolio. The company has strong profitability and financial stability, two metrics I look for when making a purchase for the long haul. NOV has a P/E Ratio of 9.27, which is below the S&P average and a discount even for NOV. This indicates a sale to me.
This stock is undervalued, probably because of uncertainty in oil values and the drop in crude per barrel pricing. NOV operates relatively debt free with a 15% debt to equity ratio. NOV has massive cash reserves and contracts in place to ensure future revenues. NOV has also recently initiated a stock buyback strategy that NOV to buy back $3 Billion in stock. Lastly, National-Oilwell Varco’s dividend payout percentage is low, 32%, which leaves plenty or room for future increases in dividends and protection against reducing dividends while the energy sector is down.
Three Year Averages
Earnings per share — 11.76%
Net Income — 11.84%
Revenue Growth — 10.98%
Long Term Debt to Equity — 10.2%
Cash Coverage Ratio — 70.12
Gross Profit Margin — 27.1%
Operating Profit Margin — 17.6%
Net Profit Margin — 12.3%
Return on Assets — 7.5%
Return on Equity — 11.4%
I believe that recent Energy Sector fears have led to a fire sale of Energy stocks. If something is on fire you should run away. However, not before assessing the situation. After reviewing NOV, I feel that the company is properly positioned to weather this temporary storm and come out on top. The facts are that National-Oilwell Varco has limited debt, cash reserves and a low dividend payout ratio.
These three factors have led me to zig when others zag. I am walking into the fire and doubling down on National-Oilwell Varco. This purchase takes me a few percentage points closer to completion of my 2015 goal to add $23,000 to my Investment Hunting portfolio.
What are your thoughts on the energy sector in 2015? Do you have an opinion on National-Oilwell Varco?
Full Disclosure: Long on NOV, BBL, VLO.