NOV has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 6.3% to $18.63 per share while the index has gained 7.7%.
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Why Do We Think NOV Will Underperform?
We don’t have much confidence in NOV. Here are three reasons why there are better opportunities than NOV, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Cyclical industries such as Energy can make mediocre companies look great for a time, but a long-term view reveals which businesses can actually withstand and adapt to changing conditions. Over the last five years, NOV grew its sales at a mediocre 9.8% compounded annual growth rate. This fell short of our benchmark for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
NOV, which averaged 20.3% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
NOV has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.4%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
We see the value of companies helping consumers, but in the case of NOV, we’re out. That said, the stock currently trades at 18.1× forward P/E (or $18.63 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Like More Than NOV
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