NOV Shares Fall -5.2% Today — Is This an Opportunity or a Value Trap?

Standing out among the Street's worst performers today is NOV, an oil & gas equipment & services company whose shares slumped -5.2% to a price of $19.26, 23.27% below its average analyst target price of $25.1. The average analyst rating for the stock is buy. NOV underperformed the S&P 500 index by -4.4% during today's aftermarket session, but outpaced it by 64.5% over the last year with a return of 48.6%.

NOV Inc. designs, constructs, manufactures, and sells systems, components, and products for oil and gas drilling and production, and industrial and renewable energy sectors worldwide. The company is an energy company. As investments, energy companies may display higher than average volatility because the price and availability of basic materials needed for production is dependent on geopolitical events. The shift towards renewable forms of energy may lessen this dependency, but is far from complete and may involve new risks of its own.

NOV's trailing 12 month P/E ratio is 963.0, based on its trailing Eps of $0.02. The company has a forward P/E ratio of 16.9 according to its forward Eps of $1.14 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the energy sector has an average P/E ratio of 9.11, and the average for the S&P 500 is 15.97.

A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.

When we divide NOV 's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.33. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!

To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, NOV 's operating margins have averaged -3.5% and displayed a mean growth rate of -102.0%. These numbers show that the company may not be on the best track.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for NOV was $90,000,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, NOV is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 10.7% and has on average been $387,000,000.00.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Nov's P/B ratio is 1.6 -- in other words, the market value of the company exceeds its book value by a factor of more than 1, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.45 as of the third quarter of 2022.

NOV is likely fairly valued at today's prices because it has an inflated P/E ratio, an average P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has mixed growth indicators because of its negative operating margins with high variability and a positive growth rate, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into NOV's fundamental values — especially their trends over the last few years, which provide the clearest picture of the company's valuation.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.