Chartists, momentum investors, and palm readers may disagree, but at The Motley Fool, we know that a stock is worth only the cash flow generated by its underlying business. But as investors, how do we know whether we're buying those cash flows on the cheap, or paying too much for future expectations?

Try using the earnings power value (EPV), a quick way to calculate the value of a company's current earnings. Once we've crunched the numbers, we can then compare the EPV to a company's stock price to determine what value investors place on its earnings growth. Then you can decide whether it's worth paying up for that potential.

If you're new to the EPV way, check out our primer here. Don't worry: You don't need a Ph.D in finance -- just a few numbers you can easily find at's quote pages. Let's take a quick look at the EPV for National Oilwell Varco (NYSE: NOV).

First: What it does
National Oilwell Varco is the largest equipment maker and distributor to the energy industry. It sells and services just about any and every product for oil and natural gas drilling: complex deepwater drilling rigs, small spare parts, and everything in between. Workers in the field say there's "No Other Vendor" than National Oilwell.

Second: The value of today's earnings
Using our handy EPV primer from above, and a 10% discount rate, we calculate the following for National Oilwell:

EPV Cash Flow (Fiscal 2010)

Current Earnings Value Per Share

Current Stock Price

Implied Value of Growth Per Share

% Growth Implied in Stock Price

$23,075 million





Sources: Capital IQ, a division of Standard & Poor's, and author's calculations.
N/A = not applicable.

Third: Is it worth it?
With the stock selling for less than its per-share EPV, we're buying any future growth in earnings for free. Sounds great, right? After all, who doesn't love free? Of course, this assumes that National Oilwell grows its earnings from levels in the trailing 12 months. Investors are skeptical. And as you can see from National Oilwell's earnings/growth rates page, analysts expect earnings to fall almost 14% in fiscal 2011. But if the company can prove skeptics wrong, we'll see some positive movement in the stock.

Fourth: National Oilwell's EPV vs. 3 others
Let's see how National Oilwell stacks up against three other oil and gas service companies. Running these three companies through our EPV calculator (using the same 10% discount rate):


Current Earnings Value Per Share

Current Stock Price

Value of Growth Per Share

% Growth Implied in Stock Price

Halliburton (NYSE: HAL)





Weatherford International (NYSE: WFT)





Schlumberger (NYSE: SLB)





Sources: Capital IQ, a division of Standard & Poor's, and author's calculations.
*Assumes a normalized tax rate.

Weatherford International has the most growth baked into the stock price, so I'm not shocked to see that analysts expect 33% annualized earnings growth over the next five years. Halliburton and Schlumberger look more reasonable, but National Oilwell -- with plenty of global opportunity ahead, especially from Brazil -- looks to be in that investing sweet spot of value waiting to be unlocked.

Remember, EPV is a handy tool to see what price investors are putting on a company's future. It's just a starting point, but a pretty good one. Give it a try, and let us know which of the above stock looks best for market-beating returns by posting your opinion down below.

At the time of publication, Andy Cross had no position in any company mentioned here. Andy is co-advisor of Motley Fool Hidden Gems and associate advisor of Motley Fool Stock Advisor. National Oilwell is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.