NOV (IL/A): Sound execution with strong orders and higher margins - Goldman Sachs - April 26, 2006
NOV posted strong 1Q results, above our estimates, with impressive orders of $1.3 bn, versus $900 mn last quarter. We raised our '06/07 EPS forecast by $0.46/0.55 to $3.51/$4.64. We also raised our Fair value to $83 (15x 2007E EV/DACF), which implies a 21% upside potential. Rig Technology margins continued to improve, suggesting solid execution, better pricing and smooth integration with Varco. Performance of the Petroleum Services and Supplies group was also strong with high incrementals. We expect orders to continue at high levels into the 2Q06 as demand for rig capital goods remains very robust. We rate NOV IL/A, but we expect NOV shares to be strong in the near term due to impressive 1Q and likely upwards EPS revisions.
RECOMMENDATION UPDATE: NOV (IL/A) is in a great strategic position being a leading provider of rig capital equipment amidst the largest newbuild cycle in decades. Very strong 1Q orders of $1.3 billion demonstrate that demand remains very robust, which should continue to boost growth/margins over the coming quarters. This is the third consecutive quarter of margin expansion in Rig Technology and management expects further gains in the 2Q06, which indicates that integration with Varco remains smooth and that solid execution continues. We expect NOV shares to be strong in the near term due to strong 1Q and likely upwards EPS revisions.
IMPLICATIONS FOR THE INDUSTRY: STRONG DEMAND FOR RIG EQUIPMENT CONTINUES - NOV posted orders of $1.3 billion, up from $900 million in the 4Q05. 1Q performance and management comments suggest that demand remains very strong and that pricing is starting to improve, which should help NOV's top line and incrementals. Management expects orders to remain strong in the 2Q at around $1 billion, although actual orders have been consistently above management guidance. Backlog stood at $3.2 billion at the end of March. Around $1.5 bn of the backlog should flow through results in 2006, $1 billion in 2007, $700 mn in 2008 and $100 million in 2009/2010 (difference is rounding). Good visibility through 2008 supports our view that we are far from peak and that this upcycle should last at least another 2-3 years, probably more.
WHAT TO WATCH FOR:
(1) Orders in the 2Q06 (management indicated $1 bn);
(2) Ability to continue to expand Rig Technology margins;
(3) Continued ability to raise prices.
RAISING ESTIMATES, FAIR VALUE: We raised our '06/07 EPS forecast by $0.46/0.55 to $3.51/$4.64. We also raised our Fair value to $83 (15x 2007E EV/DACF), which implies a 21% upside potential. The key drivers for our increased estimates were higher revenues/margins in Rig Technology (RT) and Petroleum Services and Supplies (PSS). The $0.46 increase in our 2006 EPS estimate can be broken down as follows:
(1) Rig Technology (+$0.24);
(2) Petroleum Services and Supplies (+$0.21);
(3) Distribution Services (+$0.09); and
(4) corporate and other non-operating items (-$0.08).
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA. |
