Earnings Scorecard: National-Oilwell (NOV)

Oilfield service company National-Oilwell Varco (NOV) reported its second quarter 2010 results on July 29. The reported quarter earnings results were 4 cents higher than the Zacks Consensus Estimate, attributable to proficient managerial skills and the company’s diversified technology portfolio.

Second Quarter Recap

The company’s earnings per share in the quarter, including after-tax charge, were 96 cents, 81.1% above the prior-year quarter result of 53 cents.

Total revenue of $2.94 billion declined 2.3% year over year and was also below the Zacks Consensus Estimate.

On a segmental basis, revenues of Rig Technology segment dipped about 12.8% year over year, while both Petroleum Services & Supplies and Distribution Services segments generated year-over-year revenue growth of 13.1% and 19.7%, respectively.

During the quarter, National-Oilwell Varco added $689 million of orders to its capital equipment backlog. The company also lost $29 million due to order cancellations, adjustments and change orders. Backlog for capital equipment orders for the company’s Rig Technology segment was $4.9 billion at June 30, 2010, down from $5.4 billion at March 31, 2010.

(Read our full coverage on this earnings report: NOV Beats, Backlog Slides)

Earnings Estimate Revisions – Overview

Following the earnings release, estimates have moved up. The estimate revision trends and the magnitude of such revisions justify the company’s balance sheet and positive operating trends.

Agreement of Analysts

Looking at the estimates’ revision trends, it becomes clear that a majority of the analysts project an upbeat outlook for National-Oilwell Varco’s third quarter 2010 and FY10 earnings. Of the total 22 analysts covering the stock, 9 have raised their estimates for the third quarter 2010 and none of the analysts has moved in the opposite direction over the last 7 days.

Also, for FY10, 9 analysts have upped their estimates, while no downward revision was witnessed. The high number of upward estimate revisions for the upcoming quarter and FY10 indicates the analysts’ confidence in the performance of the stock in the near term.

Magnitude of Estimate Revisions

Taking into effect the analysts’ upward earnings revision, the Zacks Consensus Estimate for the third quarter of 2010 inched up slightly to 89 cents from the estimate of 87 cents over the last 7 days.

Similarly, the earnings estimate for FY10 also moved up slightly to $3.80 cents from $3.73 over the last 7 days, reflecting the analysts’ positive sentiment towards the stock.

Earnings Surprise

With respect to earnings surprise, National-Oilwell Varco shows a favorable trend in the last 4 quarters. The company has recorded positive surprises in the trailing 4 quarters with the minimum surprise of 4.3% in the second quarter of 2010 to the maximum of 29.4% in the first quarter of 2010. However, on an average basis, the earnings surprise was a positive 19.7%. Based on the current flow, we expect the company to come up with healthy results in the upcoming quarters.

Our Recommendation

We appreciate National-Oilwell Varco’s strong balance sheet and an impressive business model, which provide the company with a leading market position. We also believe that the company is set for long-term growth prospects based on the exposure to the energy markets and strong international operations.

However, the company’s vulnerability to the current economic downturn and commodity-price uncertainty compels us to maintain a long-term Neutral recommendation for the stock. This is supported by the company’s Zacks #3 Rank (‘Hold’), implying that the stock will perform in line the broader U.S. equity market over the next one to three months.

NATL OILWELL VR (NOV): Free Stock Analysis Report

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