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Cause for Concern with NOV Inventory Levels?



March 27, 2015 – Comments (2) | RELATED TICKERS: NOV , DNOW

I'm guessing like most NOV investors, I'm wondering a bit what the next few quarters are going to hold.  Profits will take a hit, but just how bad?

Nobody can tell the future, but inventory levels can provide an indication if management has made a few of the right prepatory steps.  If inventory if growing uncontrollably heading into a period of weakness, earnings are likely to get hit extra hard as management takes mark downs and dumps some product at non-optimal prices.  Alternatively, if management tries to maintain margins, asset turnover will take a hit.  Either way, it all leads to a reduction in ROA.

Taking a quick glance at NOV's inventory levels don't really seem that bad.  Over the past 4 years inventory has been $4, 5.9, 5.7, and 5.3B.   Inventory is near all-time highs, but its not too out of line over the past few years.

But here's the thing: NOV technically offloaded a bunch of inventory when it spun off DNOW.  A look at DNOW's balance sheet showed about $900MM in total inventories.

So if we adjust NOV's inventory to account for the DNOW spinoff, inventory levels actually rose about 11% last year, and are pretty much at all-time highs.  For me, that's a bit of a cause for concern.

I just read Fooling Some of the People - and I have to say Einhorn is truly a 2nd level thinker.  Following his lead is something I'll definitely be considering, going forward.

Why is this important?  He just dumped his entire stake of NOV just this past quarter.

Just some food for thought.

Long NOV. 


2 Comments – Post Your Own

#1) On March 30, 2015 at 12:39 AM, TDRH (97.16) wrote:

NOV is going to be pounded for the next two years, inventory or no.  The moat around the company will remain intact, but the overal market it is in is shifting/contracting rapidly.    Inventories naturally increase in the short term of a rapid downturn.   Long lead  material is ordered based on forecast.  The forcasts are based off of historical transactions and needs for new construction. 

 More important  to me than inventory is the contraction of the backlog.   For then next two to three years capital spending on new construction will be non-existant.   Rigs are being stacked/scrapped and companies are paying shipyards to delay delivery of drilling vessels under construction without contract.     The backlog is what will keep blood flowing to the organs, though there should be a significant downsizing in scale and layoffs to reflect the market condition. 

Inventory is very important, but the backlog is the indication of what type and size of company will survive the current storm.

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#2) On March 30, 2015 at 3:19 AM, ElCid16 (94.64) wrote:

YOY (2013 to 2014) backlog fell from $16.2B to $14.3B.  QOQ (Q3 2014 to Q4 2014) backlog fell from $16.3B to $14.3B.

Pretty steep drop off in a single quarter. To be determined how bad it will get over the next few quarters.

The markets have already priced a huge 2015 hit to earnings. You don't see a >40% decline in share price over a span of 6 months for a small blip.

Gross cash now comprises nearly 20% of the market cap and the company is trading at book.  If management plays their cards right, they could repurchase 5-10% of oustanding shares over the next 52 weeks.

Einhorn was the big seller the Q4, but all in all, a lot of buyers in the $65-75 range. 

Why two years of industry contraction?  Just a prediction?  

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