Copy Warren Buffett’s Latest Move

by Wall St. Daily
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Submitted by Wall St. Daily using our Trefis Contributor Tool

Warren Buffett has a history of getting things right.

And he just made another prescient decision by picking up shares of National-Oilwell Varco (NYSE: NOV).

Buffett’s Berkshire Hathaway (NYSE: BRK.A) added 2.8 million shares of the drilling equipment company in the second quarter.

If you’re not familiar, National Oilwell is an oil services company that often gets overshadowed by the likes of Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI).

But it’s a powerful company that’s made some very shrewd acquisitions – about 300 over the last 15 years, in fact.

This year, National Oilwell has announced nine takeovers – six in the second quarter alone – to strengthen its position in the highly competitive field.

The latest deal was a $2.54 billion cash buyout of rival, Robbins & Myers. The deal is National Oilwell’s largest since the 2007 acquisition of Grant Prideco for $7.4 billion.

The deal is also poised to become the most beneficial.

You see, National Oilwell is already a leading manufacturer of blowout preventers – the pieces of oil-drilling safety equipment that gained infamy in the wake of the BP (NYSE: BP) oil spill.

Since the spill, new legislation has passed that requires two sets of these devices on every oil rig, onshore or off. National Oilwell was already the second-biggest supplier of blowout preventers in the land-drilling market. But now that it’s taking over Robbins & Myers, which was the fourth biggest, it’ll claim the dominant share of this crucial and growing market.

Robbins & Myers also has a strong process solutions business through which it sells reactors and storage units to pharmaceutical and chemicals companies. That’s important, because the natural gas boom has increased demand for liquid chemicals like propane and ethane, creating a bigger market for this business.

Overall, the resulting synergies are expected to add an additional $0.25 to $0.35 per share to National Oilwell’s bottom line. That’s good for a company that saw a 21% surge in revenue and a 20% boost in income last year. Better still, National Oilwell anticipates annual earnings growth of 16.25% over the next five years.

Yet even with its recent acquisition spree, the company remains very well capitalized.

National Oilwell maintains a profit margin of 13.6%, an operating margin of 19.82% and operating cash flow of $939 million. The company’s balance sheet is strong, as well, with $1.92 billion in cash and just $1.45 billion in total debt.

And even though it’s rallied nearly 7% since the takeover’s announcement, the company’s stock remains a steal. Currently, it has a P/E of 14.64, a price-to-book ratio of 1.81 and a dividend yield of 0.6%.

Plus, the mere fact that Berkshire has shown interest will likely be enough to move its price considerably higher.

Remember, a 2007 study by two university professors titled “Imitation is the Sincerest Form of Flattery” showed that buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns.

“A hypothetical portfolio that mimics Berkshire’s investments created the month after they are publicly disclosed… earns positive abnormal returns of 14.26% per year,” the study found.

So if you’re smart, you’ll follow Buffett’s lead and consider buying National Oilwell stock.

And if you’re wondering what else Buffet’s up to, in the second quarter, Berkshire  added about 27 million shares of refiner, Phillips 66 (NYSE: PSX). These shares came as part of Phillips’ spinoff from ConocoPhillips (NYSE: COP) – a stock Buffett’s held for years.

The firm also liquidated its entire position in Intel (Nasdaq: INTC) and sold 64% of its Johnson & Johnson (NYSE: JNJ) stake.

You can take that for what it’s worth.

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