U.S. markets closed
  • S&P 500

    3,269.96
    -40.15 (-1.21%)
     
  • Dow 30

    26,501.60
    -157.51 (-0.59%)
     
  • Nasdaq

    10,911.59
    -274.00 (-2.45%)
     
  • Russell 2000

    1,538.48
    -23.10 (-1.48%)
     
  • Crude Oil

    35.72
    -0.45 (-1.24%)
     
  • Gold

    1,878.80
    +10.80 (+0.58%)
     
  • Silver

    23.72
    +0.35 (+1.52%)
     
  • EUR/USD

    1.1650
    -0.0029 (-0.24%)
     
  • 10-Yr Bond

    0.8600
    +0.0250 (+2.99%)
     
  • GBP/USD

    1.2951
    +0.0028 (+0.22%)
     
  • USD/JPY

    104.6200
    +0.0100 (+0.01%)
     
  • BTC-USD

    13,830.87
    +216.26 (+1.59%)
     
  • CMC Crypto 200

    265.42
    +1.78 (+0.68%)
     
  • FTSE 100

    5,577.27
    -4.48 (-0.08%)
     
  • Nikkei 225

    22,977.13
    -354.81 (-1.52%)
     

Estimating The Intrinsic Value Of National Oilwell Varco, Inc. (NYSE:NOV)

Simply Wall St
·6 mins read

Today we will run through one way of estimating the intrinsic value of National Oilwell Varco, Inc. (NYSE:NOV) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for National Oilwell Varco

Step by step through the calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$220.2m

US$120.3m

US$385.0m

US$417.0m

US$441.2m

US$462.0m

US$480.3m

US$496.9m

US$512.2m

US$526.6m

Growth Rate Estimate Source

Analyst x12

Analyst x7

Analyst x3

Analyst x3

Est @ 5.79%

Est @ 4.72%

Est @ 3.97%

Est @ 3.45%

Est @ 3.08%

Est @ 2.82%

Present Value ($, Millions) Discounted @ 13%

US$195

US$94.4

US$268

US$257

US$241

US$224

US$206

US$189

US$172

US$157

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.0b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 13%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$527m× (1 + 2.2%) ÷ (13%– 2.2%) = US$5.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.1b÷ ( 1 + 13%)10= US$1.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$9.5, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at National Oilwell Varco as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 13%, which is based on a levered beta of 1.771. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For National Oilwell Varco, we've put together three essential factors you should look at:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with National Oilwell Varco , and understanding it should be part of your investment process.

  2. Future Earnings: How does NOV's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.