The National-Oilwell Varco Disappointment May Finally Be Over

Morgan Stanley believes that the negative catalysts underlying its bearish thesis on National-Oilwell Varco, Inc. NOV have played out, and the firm has upgraded the stock from Underweight to Overweight. Analyst Ole Slorer believes the market should shift its focus to the company’s $4 EPS potential.

“We estimate that at the 2014 peak, EBIT from new offshore rigs was $1.1bn, or 25% of total & ~$2 of the $6.08 in EPS in 2014,” Slorer explains. “We thus see $2.50-3.00 as midcycle earnings by late 2018 and over $4 by 2020.”

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The fact that National-Oilwell has underperformed its oil services peers but has exhausted its negative catalysts makes the stock a top contrarian pick in Slorer’s eyes. He sees a solid balance sheet and the potential for strong earnings momentum going forward.

Morgan Stanley predicts that the stock could re-rate to 9X its 2018 EBITDA estimates of about $2 billion.

“We expect multiple expansion during the recovery driven by a change in mix away from backlog-heavy offshore rigs that typically commands a lower multiple, towards consumables and aftermarket segments, which should allow NOV’s recovery EV/EBITDA multiples to be closer to those of the service majors near 10x,” Soler notes.

Morgan Stanley now has a $45 price target for National-Oilwell.

Disclosure: the author holds no position in the stocks mentioned.