We maintain our Buy recommendation on National-Oilwell Varco Inc. (NYSE: NOV) since the drilling equipment manufacturer retains its strength thanks to its strong leverage in the oilfield cycle. Peak-cycle commodity prices and capital outlays for exploration and production activities should keep the company's demand in robust health for the next few years.
New orders worth $2 billion in the first quarter have brought the company's total backlog to a record $9.9 billion, which highlights the company's strong earnings visibility going forward. It also reported better-than-expected first-quarter results.
To add to that, deepwater lease awards, discoveries in Brazil and the growing search for oil into new frontiers have significantly increased the demand for technologically advanced rigs, which the company is in a position to supply. The demands for supplying parts to its installed rigs should help drive earnings momentum in the near-to-medium term. The recent acquisition of Grant Prideco (NYSE: GRP) has further consolidated the company's position.
This has resulted in the company enjoying a very strong cyclical leverage. We raise our price objective to $100 from $85 before. This reflects 2009 P/E and EV/EBITDA multiples of 20.9x and 4.5x, respectively, both well within historical trading ranges. We believe that the company's strong late-cycle leverage and its dominant market share position justify the valuation premium.
Monday, June 2, 2008
Varco Keeps Things Pumping
Zacks: Varco Keeps Things A-Pumpin'