What to Watch When NOW Inc. Reports

By Markets Fool.com

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Oil-field equipment distributor DistributionNow (NYSE: NOW), or NOW, has struggled over the past several quarters due to a significant drop-off in demand for energy-related equipment. Those tough market conditions persisted during the second quarter, which will likely weigh heavily on the company's results. Because of that, there are a couple of things for investors to keep an eye on when reviewing its second-quarter results.

Cash flow is king

There isn't much NOW can do about the current market environment, because the continued decline in the rig count reduces the need for equipment. Instead, CEO Robert Workman said that the company's focus right now is on the fundamentals of its business. What this means is that it needs to be "maximizing cash generation by improving collections, monetizing inventory, curbing excess costs and integrating recent acquisitions," according to Workman.

The metric to watch here is cash flow from operations. By being diligent on collections and managing its inventory, NOW will turn more of its slumping sales and inventory into cash, which it can then use for other things such as acquisitions. Meanwhile, keeping its costs at bay, especially by quickly integrating acquisitions, will ensure that it is not wasting money when cash is at a premium. The company did a great job with thislast quarter by generating $89 million in cash flow from operating activities, which was a huge reversal from the prior period, when it used $13 million in cash.

Take a look at the outlook

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The other important thing to keep an eye on this quarter is for any changes in NOW's outlook. Last quarter, Workman said that "market conditions entering 2016 remain difficult" due to the continued decline in the rig count. While the rig count continued to decline in the second quarter, that trend is reversing in the third quarter. According to oil-field service company Baker Hughes (NYSE: BHI), the rig count climbed for the past five weeks. Furthermore, Baker Hughes said that the rise in the oil rig count last week was the largest increase so far this year. Given the improving rig count, investors should look to see if Workman is starting to feel more optimistic about the balance of the year.

One other thing to keep in mind is that oil-field service companies are at odds when it comes to their outlook for the remainder of the year. Baker Hughes' CEO saidon its conference call that he does not see a recovery in drilling or service prices this year, believing that oil needs to be in the upper $50s to fuel a recovery. Rival Halliburton (NYSE: HAL), on the other hand, believes that the North American market has already started to turn around. Halliburton is basing that view on the expectation that the rig counthas hit bottom and is now recovering. Because of these differences, investors should look to see not only what NOW says about its outlook but whether it has experienced any uptick in sales since the third quarter started.

Investor takeaway

Investors can all but bank on NOW reporting another quarterly decline in revenue due to the continued drop in oil and gas activities. That is why the company needs to turn as much of its slumping sales into cash as possible. That cash will give it the flexibility to continue making acquisitions so that it can take full advantage of the eventual upturn, which just might be right around the corner.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Halliburton. 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.