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Energy and industrial distributor NOW Inc. (NYSE:DNOW) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 6.6% year on year to $633 million. Its non-GAAP profit of $0.25 per share was flat year on year.
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NOW (DNOW) Q2 CY2024 Highlights:
- Revenue: $633 million vs analyst estimates of $634.7 million (small miss)
- EPS (non-GAAP): $0.25 vs analyst estimates of $0.24 (4.2% beat)
- Gross Margin (GAAP): 21.8%, in line with the same quarter last year
- EBITDA Margin: 7.9%, in line with the same quarter last year
- Market Capitalization: $1.50 billion
Infrastructure DistributorsFocusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.
Sales GrowthA company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. NOW's demand was weak over the last five years as its sales fell by 5.8% annually, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. NOW's annualized revenue growth of 11.5% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
This quarter, NOW grew its revenue by 6.6% year on year, and its $633 million of revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 9.6% over the next 12 months, an acceleration from this quarter.
Operating MarginAlthough NOW was profitable this quarter from an operational perspective, it's generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 2% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It's hard to trust that NOW can endure a full cycle.
On the bright side, NOW's annual operating margin rose by 26.1 percentage points over the last five years. Still, it will take much more for the company to show consistent profitability.
In Q2, NOW generated an operating profit margin of 5.2%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
NOW's EPS grew at a spectacular 15.2% compounded annual growth rate over the last five years, higher than its 5.8% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.
Diving into the nuances of NOW's earnings can give us a better understanding of its performance. As we mentioned earlier, NOW's operating margin was flat this quarter but expanded by 26.1 percentage points over the last five years. On top of that, its share count shrank by 1.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For NOW, its two-year annual EPS growth of 34.7% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, NOW reported EPS at $0.25, in line with the same quarter last year. This print beat analysts' estimates by 4.2%. Over the next 12 months, Wall Street expects NOW to grow its earnings. Analysts are projecting its EPS of $0.95 in the last year to climb by 13.9% to $1.08.
Key Takeaways from NOW's Q2 Results It was good to see NOW beat analysts' EPS expectations this quarter. On the other hand, its revenue unfortunately missed. Zooming out, we think this was still a mixed, quarter. The stock remained flat at $14.06 immediately following the results.
