If history has proven anything, it's that no one else is quite like Warren Buffett. A few people may be able to beat the performance of Berkshire Hathaway (NYSE:BRK-B) for a couple years or maybe a little longer, but no one has been able to replicate that success over several decades like Warren has.
Every once in a great while, though, thanks to the complete irrationality of the market sometimes, we can occasionally beat him at his own game by picking up stocks Berkshire Hathaway owns for less than what it bought it for. Today, one of those opportunities has presented itself, and it makes today a great time to buy National Oilwell Varco (NYSE:NOV).
Why Buffett bought NOV in the first place
Even though so few have actually been able to replicate his success, the core tenets of Buffett's investment strategy are almost comically simple: buy great companies at a reasonable price. For some, though, the question is: What constitutes a great company? Fortunately, Warren Buffett has been very generous with disclosing with what he looks for in this regard: a company with a superior competitive advantage, the ability to handle the ups and downs of the market, and the ability to generate excess cash from its business. Here's how National Oilwell Varco stacks up in these categories.
Competitive advantage: It really helps when a business creates business for itself, and this is pretty much what National Oilwell Varco specializes in. To start, it builds the big-ticket items that companies need to drill for oil and gas: land rigs and the drilling package for floating offshore rigs. Since these rigs are built on a standardized platform -- the first company in the industry to do that -- it means those that bought those rigs go back for NOV for replacement parts such as drill bits. By creating this virtuous cycle, the company has been able to capture over 60% of the global offshore drilling equipment market. Competitive advantage: check.
Built to last: We all know that oil and gas is a commodity market, and it will go through fits and starts when supply or demand get out of whack. For National Oilwell Varco, the company's success is slightly tied to drilling activity of producers and how much they are willing to spend at any given time. However, thanks to its history of buying up small competitors to consolidate the oil and gas equipment manufacturer market, the company has been able to weather the storms of the market better and grow its profits faster in the good times than any of its peers.
Able to handle any market: check.
Free cash flow generation: This is where National Oilwell Varco really excels. In an industry that is known to be a complete capital killer, National Oilwell Varco has been able to take those competitive advantages and turn them into fat wads of free cash flow. When you compare NOV to its peers, it doesn't even come close.
|Company||Levered Free Cash Flow Margin|
|National Oilwell Varco||18.93%|
Cash generator: You betcha.
How you can be a more shrewd operator than Warren Buffett ... this time
The nice thing about following the Berkshire Hathaway portfolio is that it discloses all of the purchases it makes. With this information, we can back track and use some basic valuation metrics to see what -- roughly -- Berkshire bought that stock for. National Oilwell Varco was added to the Berkshire portfolio back in the first quarter of 2012. There were some other buys afterward, but let's use this as the benchmark for what Buffett deems a good price. During that quarter, shares of NOV traded -- on average -- at these valuation metrics.
|National Oilwell Varco valuation||Period during Berkshire Hathaway's initial acquisition|
|Enterprise Value/Total Revenue||
|Market Capitalization/Levered Free Cash Flow||19.08x|
With Wall Street indiscriminately treating any stock with the word energy tied to it, shares of National Oilwell Varco have been hammered. In three months alone shares are down 22%, pretty much all attributed to the slide in oil prices over the same time.
Thanks to this major slide, investors who want to pick up a company that passes the Warren Buffett test for even less than what Berkshire paid for shares, then now is the time. Based on what shares trade at today, NOV's valuation looks like a steal compared to the time of the Berkshire purchase.
|National Oilwell Varco valuation (all numbers TTM)||Current|
|Enterprise Value/Total Revenue||
|Market Capitalization/Levered Free Cash Flow||6.83x|
What a Fool believes
Every once in a while, the stars align for investors who have been looking at a great company for a long time, but just hasn't quite been ready to buy because of the stock price. When these stocks take a -- mostly unwarranted -- tumble, it makes for that buying opportunity they have been waiting for. For National Oilwell Varco, this is one of those times. With oil prices at current levels, there is no guarantee that this is the lowest that share prices will drop. However, if you can get shares at today's prices, you won't be disappointed in the long run, and you even get to puff out your chest that you were able to out buy one of the best buyers of companies in the history of investing.
Tyler Crowe owns shares of Berkshire Hathaway and National Oilwell Varco. The Motley Fool recommends Berkshire Hathaway, FMC Technologies, Halliburton, and National Oilwell Varco. The Motley Fool owns shares of Berkshire Hathaway and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.