National-Oilwell Varco, Inc. (NYSE:NOV) — On Feb. 8 Credit Suisse raised NOV stock from “underperform” to “neutral” with the tagline “The Tide Is Turning,” and on Wednesday Morgan Stanley increased their long-term price target in a research report titled, “Deeper Rethink: Path to $100.”
The Morgan Stanley analyst admits that his opinion is an “out-of-consensus bullish stance.” However, my hunch is that The Street will favorably scrutinize the reasoning of these analysts and agree that the stock is undervalued. Result: A consensus bullish view will be formed.
The company designs and manufactures drilling equipment and provides tools and services to the upstream oil and gas industry. Both research firms agree that the company’s shift from a predominantly off-shore supplier to on-shore and a shift away from international equipment exposure to be beneficial. And Credit Suisse points out that the industry’s shift to shale development is damaging to equipment, thus intensifying the tool replacement cycle, and focusing on NOV’s strong reputation as a manufacturing and innovative technology leader.
Morgan Stanley points out that these opportunities could generate “an incremental $4bn in annual sales by 2020 est,” and in addition add $3.6 billion from services and “consumables” from an acceleration in drilling. Cost reductions and other savings could provide earnings of up to $4 vs The Street’s expectation of $2.50, thus putting Morgan Stanley’s estimate 30%-35% above consensus for 2018 to 2020 est. EBITDA.
These estimates are made with the assumption that offshore rig construction will continue to decline and by 2018 be negligible.
Technically, from its low under $26, NOV has climbed to over $42 in almost exactly one year. Note that the rise of almost 25% was against The Street’s opinion, which was almost universally negative.
Despite the negative outlook, the stock advanced in a broad bull channel with an average spread of about 8 points from support to resistance. Last July the advance received a boost from a Golden Cross long-term buy signal that occurs when the 50-day moving average crosses through the 200-day moving average.
Additionally the advance has been accompanied by scores of CBR buy signals from my proprietary indicator. Yesterday’s close was just above the 50-day moving average at $38.76 and a quadruple support line at $37.25. Thus, traders may watch for a slight break under $38 for a buying opportunity with a price target of $48.
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