This past year has been very difficult for oil-related companies as the steep drop in oil prices has halted a lot of activity. That slowdown is expected to spill over into NOW's (NYSE:DNOW) second-quarter results, which are due out Wednesday morning. Here are three things to keep an eye on when reviewing that report.
First, let's review
The weakness in the oil market was readily apparent when NOW reported first-quarter results as revenue slumped to $863 million, which was down 20% year over year and 14% sequentially. Worse yet, the company lost money in the quarter turning in an adjusted loss of $0.02 per share, which was much worse than the $0.06 per share in profit that analysts were expecting. But the decline would have been even more pronounced if it wasn't for the company's recent acquisitions, which boosted results.
1. Did it disappoint again?
Given the company's unexpected loss last quarter, and the steepening of the oil downturn this quarter, analysts have a very somber view of NOW's upcoming quarter. The current consensus expectation is for revenue of just $685.4 million and a quarterly loss of $0.12 per share. Those estimates mark significant declines both sequentially and in the year-ago quarter when revenue was $952 million and earnings were $0.25 per share.
What investors will want to keep an eye on is if the company can find a way to beat expectations or if it disappointed once again. There is reason to be hopeful for a better-than-expected earnings result as several oil-related companies have been able to beat expectations this past quarter due to cost-cutting initiatives. Given how many acquisitions NOW has made over the past year, the hope is that the company will be able to rapidly wring out cost synergies from recently acquired companies to boost its bottom line.
2. Was there any unexpected weaknesses?
If the company did disappoint it's likely because there were unexpected weaknesses in the quarter. Last quarter, for example, the company's Canadian operations were particularly weak as it was affected by a sharp sales decline in its fiberglass product and project-based orders, both of which are big-ticket items that customers either deferred or cut. Further, that segment was also affected by the strong dollar.
Investors should again look for any unexpected weaknesses from customers calling off sales of big-ticket items. Further, the dollar remained strong in the quarter, which could impact sales in both the company's Canadian and other international operations.
3. What's the outlook for more acquisitions?
Acquisitions are a big part of NOW's plan to drive future growth as well as to mitigate some of the impact of the oil market downturn. The company has been quite active as it closed two deals during the first quarter with a third acquisition scheduled to close in the second quarter. Further, just as the second quarter was ending the company announced yet another deal, which could close before the end of the year.
Because acquisitions are so important for the company's future, investors should keep an eye on news that more deals are in the pipeline. Also worth watching is the company's balance sheet, which NOW said last quarter was "strong," which enabled it to "continue to capitalize on attractive opportunities." Suffice it to say, investors will want that to make sure the company reiterates that strength again this quarter so that it still has the capacity to make more deals.
Given how weak the oil market was during the quarter there's an expectation that NOW's results will be rather weak. But if the company can cut costs by rapidly integrating recent acquisitions then it's still possible that it will beat the muted expectations of analysts. That said, given the importance of acquisitions what investors really want to see is that the company not only made progress in achieving acquisition synergies to cut costs, but that it sees a full pipeline of compelling future opportunities on the horizon.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends NOW. The Motley Fool owns shares of NOW. 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.