Nabors Industries’s 19.6% return over the past six months has outpaced the S&P 500 by 6.7%, and its stock price has climbed to $91.65 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Nabors Industries, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Nabors Industries Not Exciting?
We’re happy investors have made money, but we’re passing on Nabors Industries for now. Here are two reasons why there are better opportunities than NBR, plus one stock we’d rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Nabors Industries, which averaged 39.1% gross margin over the last five years, exhibits poor unit economics in the sector. It means the company will struggle more at lower commodity prices than peers with better gross margins.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Nabors Industries has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.9%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
Nabors Industries isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 48.9× forward P/E (or $91.65 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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