End markets in oil and gas and global industrial infrastructure are challenged. The industrial complex, in the second quarter, pretty much proved this reality. Global growth is slow. Backlog and capital expenditures are skimpy compared to last year.
All of this we knew. But the quarter showed us that the second half of 2016 will not be much better.
It's a stock picker's game, then, in certain parts of the industrial market. Where is our margin for safety? Take National Oilwell Varco (NOV) , which reported dismal second-quarter earnings this morning, effectively in line with the paltry estimates out there. The stock is down almost 28% over the last year and 6% year to date.
Expectations have been rationalized to reflect a really poor Rig Systems spending environment. Book-to-bill is a weak 15% as of June 30; with scant orders as we enter the second half. Sales in this segment were down 39% sequentially and a whopping 71% year over year. We are basically at the zero bound in this segment -- there is nowhere to go but up.
NOV's Rig aftermarket, on the other hand, was steadier, but still quite weak. Sales in the quarter were down 7% sequentially. But thank goodness for this segment from a profitability perspective. Margins are holding well, despite this tough operating environment.
Wellbore Technologies and Completion/Production Solutions also showed weak results.
Overall, it was a depressing press release on the surface. But as I dig deeper, I see some interesting margin-of-safety attributes. The stock will not go much lower than this, in my view.
First, the Rig Systems environment is crazy cyclical, and we are at zero in this segment. Anyone choosing to look forward can see a slightly better picture, especially as NOV continues to appropriately restructure costs. The company has leadership and staying power in this business. There will be an upturn in the future.
Second, NOV's balance sheet book value is $42.60. Even taking a bite out of the $10.7 billion in goodwill and intangibles provides us with a decent support. Tangible book value, excluding all of this goodwill, is almost $16 per share.
Third, the company continues to pick away at niche acquisitions and it has plenty of firepower -- $4.4 billion of available credit and $1.63 billion in net debt currently.
At the beginning part of the conference call this morning, NOV said it sees a better EBITDA picture for the balance of the year, based on small improvements in Wellbore and Completion/Production revenue. The company is not ready to call a bottom, but cost-cutting will help improve cash flow.
The second quarter seems like the bottom. The stock should go higher for anyone who chooses to value this franchise appropriately.