Earnings

Comparing National Oilwell Varco, Inc. (NOV) and RPC, Inc. (RES)

National Oilwell Varco, Inc. (NYSE:NOV) shares are down more than -11.70% this year and recently decreased -1.37% or -$0.46 to settle at $33.06. RPC, Inc. (NYSE:RES), on the other hand, is up 22.24% year to date as of 11/13/2017. It currently trades at $24.15 and has returned -7.78% during the past week.

National Oilwell Varco, Inc. (NYSE:NOV) and RPC, Inc. (NYSE:RES) are the two most active stocks in the Oil & Gas Equipment & Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, RES is expected to grow at a -10.00% annual rate. All else equal, NOV’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 9.88% for RPC, Inc. (RES). NOV’s ROI is -12.80% while RES has a ROI of -17.50%. The interpretation is that NOV’s business generates a higher return on investment than RES’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. NOV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.45. Comparatively, RES’s free cash flow per share was +0.11. On a percent-of-sales basis, NOV’s free cash flow was 2.36% while RES converted 0% of its revenues into cash flow. This means that, for a given level of sales, NOV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. NOV has a current ratio of 2.80 compared to 3.90 for RES. This means that RES can more easily cover its most immediate liabilities over the next twelve months. NOV’s debt-to-equity ratio is 0.23 versus a D/E of 0.00 for RES. NOV is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NOV trades at a forward P/E of 106.30, a P/B of 0.88, and a P/S of 1.84, compared to a forward P/E of 15.86, a P/B of 5.86, and a P/S of 3.84 for RES. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. NOV is currently priced at a -3.16% to its one-year price target of 34.14. Comparatively, RES is -2.74% relative to its price target of 24.83. This suggests that NOV is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.90 for NOV and 2.50 for RES, which implies that analysts are more bullish on the outlook for NOV.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. NOV has a beta of 0.98 and RES’s beta is 1.15. NOV’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.NOV has a short ratio of 9.92 compared to a short interest of 17.91 for RES. This implies that the market is currently less bearish on the outlook for NOV.

Summary

National Oilwell Varco, Inc. (NYSE:NOV) beats RPC, Inc. (NYSE:RES) on a total of 9 of the 14 factors compared between the two stocks. NOV is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, NOV is the cheaper of the two stocks on book value and sales basis, NOV is more undervalued relative to its price target. Finally, NOV has better sentiment signals based on short interest.

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