DNOW Inc (DNOW)
Potential Value in a Merger
Two companies that sell pipes and pumps to oil companies are joining forces. DNOW and MRC Global just agreed to merge, and this deal could make both companies much more profitable.
What's Happening
DNOW is buying MRC Global in a stock swap. MRC shareholders will get nearly one DNOW share for each MRC share they own. When it's done, the combined company will be worth $2.6 billion and will dominate the market for selling equipment to oil and gas companies across North America.
The stocks dropped after the initial excitement wore off. But this creates a good buying opportunity for investors who understand what's really happening here.
Why This Matters
Think of these companies like Home Depot, but instead of selling to homeowners, they sell pipes, valves, and pumps to oil companies. When two big distributors merge, they can negotiate better prices from suppliers and cut duplicate costs. It's basic business math.
The oil industry has changed a lot since 2014. Companies are more careful about spending money, which means steadier demand for equipment. Both DNOW and MRC have shifted away from selling cheap steel pipes toward higher-profit items like specialized pumps and valves.
Here's the key point: both companies now make 7% to 8% profit margins. The last time MRC had margins this good, they were selling 70% more stuff. That shows how much more efficient they've become.
The Numbers Look Good
Management thinks they can save $70 million per year by combining operations. But this seems low. When Wesco bought Anixter in a similar deal, they saved about 1% of total sales. For DNOW and MRC, that would mean $100 million in savings instead of $70 million.
With those extra savings, the combined company would make about $465 million per year before taxes and interest. At today's stock price, you're paying only 6.1 times that annual profit. Most similar companies trade for 9 to 15 times their profits.
If this company grows as expected and gets a normal valuation, the stock could hit $21 to $24 per share in three years. That's a solid return from today's price around $15.
What Could Go Wrong
Oil prices drive everything in this business. If the economy crashes or oil prices collapse, sales will drop. But these are tough businesses that survive downturns better than most.
Mergers can fail if the companies can't blend their computer systems or if customers get upset during the transition. The good news is that DNOW's management team has done this before and knows how to integrate acquisitions.
Oil companies keep getting more efficient, which means they need less equipment over time. In 2014, about 1,600 oil rigs produced 9 million barrels per day. Today, just 400 rigs produce 13 million barrels daily. This trend has slowed but hasn't stopped.
The government is unlikely to block this deal since the industry remains highly fragmented with thousands of small distributors.
The Bottom Line
You're buying the future dominant player in a steady, cash-generating business at a steep discount. The merger makes financial sense, the management team has experience, and the company will have no debt to worry about.
The stock should do well as the companies combine operations and investors realize how profitable the merged business will be. Sometimes the best opportunities come when Wall Street initially yawns at good news.
Checks
DNOW is Sharia-compliant according to Zoya
Closing price of $15.82 has a 4-star rating on Morningstar
This post is for educational and informational purposes only and does not constitute financial, investment, or other professional advice. All information presented is based on personal opinion and should not be relied upon solely to make any investment decisions. You should always do your own research and consult with a licensed financial advisor, attorney, or other professional before making any financial decisions. Past performance is not indicative of future results.