Energy services company NOW Inc. (DNOW) reported better-than-expected revenue and earnings in the first quarter of fiscal 2023. Furthermore, the company is well-placed to achieve substantial growth in the upcoming quarters, driven by strong demand for its offerings, strategic partnerships and acquisitions, and rapid expansion to key geographies.
Given its sound fundamentals and bright growth outlook, this top energy stock, trading under $10, is worth owning now. In this piece, I will discuss several reasons why I am extremely bullish on DNOW.
With a $999.13 million market cap, DNOW is a leading worldwide supplier of energy and industrial solutions, products, and engineered equipment packages. From a network of locations spanning more than 20 countries and a complementary suite of online digital channels and solutions, the company offers various products to the energy and industrial markets globally.
From DNOW’s initial spin in 2014, its core strategy has been focused on driving growth by allocating capital towards strategic channels, value-added product lines and solutions, and key geographies. Since 2014, the company has acquired and integrated 19 companies into its family.
On February 16, 2023, DNOW acquired EcoVapor Recovery Systems. With the addition of EcoVapor, DNOW would offer its customers an expanding suite of emissions management and renewable energy solutions targeting the Oil and Gas and Renewable Natural Gas (RNG) markets.
EcoVapor’s suite of products is highly complementary to DNOW’s U.S. Process Solutions suite of fabricated process and production equipment products. This acquisition should boost the company’s growth and profitability.
Despite headwinds related to inclement weather, lower U.S. rig counts and completions, and weaker oil and gas prices, the company achieved better-than-expected financial results in the first quarter of 2023.
David Cherechinsky, DNOW’s President and CEO, said, “Our year is off to a nice start, including strong top- and bottom-line performance, with revenue growing 7% sequentially, driving 8% first quarter EBITDA as a percent of revenue.”
During the quarter, the company’s international segment posted strong sequential revenue growth of 28% at operating levels not seen since 2014. Also, it returned cash to shareholders by repurchasing $36 million in shares. DNOW remains debt-free with ample liquidity and possesses various tools to advance its position in the market further.
Shares of DNOW have declined 10.5% over the past month to close the last trading session at $9.34. However, Wall Street analysts expect the stock to hit $13.50 in the near term, indicating a potential upside of 44.5%.
Here’s what could influence DNOW’s performance in the upcoming months:
Robust Financials
For the first quarter that ended March 31, 2023, DNOW’s revenue increased 23.5% year-over-year to $564 million, and its operating profit grew 52.2% from the year-ago value to $35 million. The company’s non-GAAP EBITDA excluding other costs came in at $47 million, up 67.9% year-over-year.
Furthermore, non-GAAP net income attributable to DNOW excluding other costs increased 86.7% year-over-year to $28 million, while non-GAAP earnings per share attributable to DNOW stockholders excluding other costs was $0.25, an increase of 78.6% year-over-year.
Impressive Historical Growth
DNOW’s EBITDA has grown at a 54.4% CAGR over the past three years. Also, the company’s EBIT and normalized net income have increased at CAGRs of 162.6% and 266.6% over the same time frame, respectively.
Favorable Analyst Estimates
Analysts expect DNOW’s revenue to increase 11.2% year-over-year to $2.38 billion in the fiscal year ending December 2023. The company’s EPS for the current year is expected to grow 9.5% year-over-year to $1.04. Moreover, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
Additionally, the consensus revenue and EPS estimate of $2.46 billion and $1.10 for the next fiscal year 2024 indicate an improvement of 3.7% and 6.1% year-over-year, respectively.
Attractive Valuation
In terms of forward non-GAAP P/E, DNOW is currently trading at 9.09x, 45.1% lower than the 16.54x industry average. Likewise, its forward EV/Sales of 0.37x is 76.8% lower than the industry average of 1.60x, while the stock’s forward EV/EBITDA of 4.62x is 55.6% lower than the 10.39x industry average. Also, DNOW’s forward Price/Sales of 0.43x compares to the industry average of 1.30x.
POWR Ratings Show Promise
DNOW has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DNOW has a B grade for Value, consistent with its lower valuation relative to its peers. Also, it has a B grade for Growth, in sync with its robust financials and optimistic analyst estimates.
DNOW is ranked #5 out of 46 stocks in the B-rated Energy - Services industry. Click here to access DNOW’s additional POWR ratings for Sentiment, Quality, and Momentum.
View all the top stocks in the Energy - Services industry here.
Bottom Line
Despite several headwinds, DNOW delivered a solid top-and-bottom-line performance. Furthermore, the company is well-poised to witness continued growth in the upcoming quarters, supported by strength in its diversified portfolio of industry-leading energy equipment products and services; and strategic partnerships and acquisitions.
Given DNOW’s solid financials, bright growth prospects, and discounted valuation, it could be wise to buy this affordable energy stock now.
How Does NOW Inc. (DNOW) Stack up Against Its Peers?
DNOW has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Energy - Services industry with an A (Strong Buy) or B (Buy) rating: Technip Energies (THNPY), North American Construction Group Ltd. (NOA), and Ranger Energy Services, Inc. (RNGR).
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DNOW shares were unchanged in premarket trading Wednesday. Year-to-date, DNOW has declined -26.46%, versus a 7.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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