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Expectations for NOV ROA’ to remain muted following declines in 2016 may be unwarranted, as management has confidence in improved margins and business activity.
NOV is trading at a 1.3x V/A’, near historical lows. At these levels, the market is pricing in expectations for ROA’ to rebound only modestly following declines in 2016, to 7.8% in 2020, accompanied by 2.4% Asset’ growth. The firm saw both declines in ROA’ and Asset’ shrinkage in 2015 as the firm attempted to navigate a difficult energy market environment. This led to ROA’ reaching lows not seen since 2005, and Asset’ shrinkage which has only occurred once before, in 2013. At current valuations, the market is expecting ROA’ to remain muted after substantial declines in 2016, with the firm experiencing little-to-no Asset’ growth going forward, as opposed to seeing a rebound in growth and profitability back toward average historical levels. However, Valens’ qualitative analysis highlights management’s confidence in their ability to drive improved incrementals and margins, as well as the benefits of recent acquisitions and trends in their end markets. Considering management’s strong confidence in the business and historically low valuations, NOV appears to have potential for equity upside.
Company Specific Highlights & Insights:
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Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. In April, Management Confidence spiked higher, but the metric subsequently rolled over in May, falling to the low end of its range. This signaling that growth remains elusive, as management teams continue to not be confident enough to invest in their businesses.
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