Energy and industrial distributor NOW Inc. (NYSE:DNOW) missed Wall Street’s revenue expectations in Q3 CY2024 as sales rose 3.1% year on year to $606 million. Its non-GAAP profit of $0.21 per share was in line with analysts’ consensus estimates.

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Company Overview

Spun off from National Oilwell Varco, NOW Inc. (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.

Infrastructure Distributors

Focusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. NOW’s demand was weak over the last five years as its sales fell by 5.2% annually, a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. NOW’s annualized revenue growth of 8% over the last two years is above its five-year trend, suggesting some bright spots.

This quarter, NOW’s revenue grew 3.1% year on year to $606 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.2% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and shows the market thinks its products and services will face some demand challenges.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.

Although NOW was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 1.9% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, NOW’s annual operating margin rose by 31.7 percentage points over the last five years. Still, it will take much more for the company to show consistent profitability.

In Q3, NOW generated an operating profit margin of 3.8%, down 2.5 percentage points year on year. Since NOW’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

Analyzing revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

NOW’s EPS grew at an astounding 18.2% compounded annual growth rate over the last five years, higher than its 5.2% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

Diving into NOW’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, NOW’s operating margin declined this quarter but expanded by 31.7 percentage points over the last five years. Its share count also shrank by 2%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

In Q3, NOW reported EPS at $0.21, down from $0.26 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects NOW’s full-year EPS of $0.91 to shrink by 5.1%.

Key Takeaways from NOW’s Q3 Results

We struggled to find many strong positives in these results as its revenue and EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $13.75 immediately after reporting.

Is NOW an attractive investment opportunity right now? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.