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On May 15, Zacks Investment Research downgraded oilfield services behemoth, National Oilwell Varco Inc. (NOV - Analyst Report), to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

National Oilwell has witnessed sharp downward estimate revisions after reporting disappointing first-quarter 2013 results.

On Apr 26, 2013, National Oilwell reported first-quarter earnings per share (excluding transaction costs) of $1.29, missing the Zacks Consensus Estimate by 8 cents and the year-ago adjusted earnings by 15 cents. The result was affected by lower operating margin in all its segments.  

Following the weaker-than-expected earnings announcement, the Zacks Consensus Estimate for the second quarter of 2013 has moved down by 12 cents (or 8.2%) to $1.34 per share over the last 30 days. For the full year also, most of the estimates (15 out of 17) were revised downward over the same timeframe, pulling down the Zacks Consensus Estimate by 7.8% to $5.65 per share.

Moreover, with new competitors entering the market and the narrowing of capital expenditure by the drilling contractors, National Oilwell – which ranks ahead of Cameron International Corp. (CAM - Analyst Report) as the biggest U.S. maker of oilfield equipments – has seen its new equipment package pricing fall around 10% below the levels achieved during the peak of 2007–2008.

In particular, National Oilwell’s margins have been hit hard by the ongoing North American drilling slump. We expect the situation – characterized by tepid demand and weak pricing – to normalize in late 2013.

Stocks that Warrant a Look

While we expect National Oilwell to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Matrix Service Company (MTRX - Snapshot Report) and Natural Gas Services Group Inc. (NGS - Snapshot Report) as good buying opportunities. These oil field machinery and equipment providers – carrying a Zacks Rank #2 (Buy) – have solid secular growth stories and are expected to outperform the broader U.S. equity market over the next 1 to 3 months.

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