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Actionable news in NOV: NATIONAL OILWELL VARCO Inc,

Why National Oilwell Varco Has Bottomed


National Oilwell Varco has rallied 23% in the last month despite the decimation of its dividend and the collapse of its backlog.

The stock bottomed on the day it announced its dividend cut, just like Kinder Morgan and Ensco PLC.

Its mid-cycle earnings potential can provide a 50-100% return in the next 2-4 years.

National Oilwell Varco (NYSE:NOV) slashed its dividend by 89% about a month ago and reported pronouncedly gloomy results last week. Nevertheless, the stock has rallied 23% in the last month, and rallied even after its daunting earnings report. Therefore, it is only natural that investors wonder whether the stock has bottomed or it is likely to revisit its recent lows. For a highly cyclical stock like this, it is crucial to determine whether it has bottomed, because the line between huge profits and disastrous losses is really thin.

First of all, the company's Q1 earnings release was quite disappointing. To be sure, it incurred a loss for the first time in years. Its revenue fell 55% over last year, while the company lost $0.32 per share (versus a profit of $0.76 per share of last year's Q1). Even worse, Sete Brasil Participacoes filed for bankruptcy, and hence, National Oilwell Varco removed $2.09 billion from its backlog. Consequently, the backlog of the Rig Systems segment collapsed in Q1, from $6.0 billion to $3.3 billion. Moreover, the company did not receive any new orders for the second straight quarter in its major segment, which generates almost half of its total sales. Therefore, it should not be surprising that management expects a 30% further decline in revenues for the full year.

The collapse of the backlog should not be ignored by investors...