Is There a New Opportunity in DNOW After Q1 Earnings Beat Expectations?

Thinking about what to do with DNOW? You are definitely not alone, especially after seeing how this stock has caught both setbacks and surges recently. Zooming out, DNOW has stacked up an impressive 13.3% gain over the past year, and if you’ve been holding longer, you’re probably smiling at that incredible 175.5% growth over five years. On the flip side, the last month was a bit rough, with the stock dipping 7.4%. Last week showed a modest 0.9% pop. It’s been a rollercoaster, and for good reason.

Market sentiment around DNOW has shifted in the wake of broader developments in the industrial supply and energy sectors, prompting investors to reassess both risk and potential payoff. While these sector trends jostle prices day to day, smart investors lean on data. That’s where DNOW stands out: on a widely-used six-point valuation scorecard, the company is undervalued in five out of six checks, bringing its value score to an impressive 5. This suggests DNOW may offer more upside than meets the eye, if you know where to look.

Next, let’s break down which valuation methods matter most for DNOW right now. Later in the article, we’ll explore a potentially more insightful way to view the company’s true worth.

DNOW delivered 13.3% returns over the last year. See how this stacks up to the rest of the Trade Distributors industry.

Approach 1: DNOW Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company's intrinsic value by forecasting its future cash flows and then discounting those projections back to their present value. This approach is especially useful for evaluating companies like DNOW, where potential future performance may not be fully reflected in the current stock price.

For DNOW, the latest reported Free Cash Flow (FCF) stands at $211.7 million. Analyst estimates project FCF to be $171.8 million by 2029, with 10-year forward projections continuing to rise modestly each year. Since analysts cover only up to five years, longer-term forecasts rely on extrapolation for years beyond 2029.

Using a two-stage Free Cash Flow to Equity model, DNOW's estimated intrinsic value lands at $30.21 per share. Compared to the stock’s current trading price, this represents an implied discount of 53.4%. In other words, the shares are significantly undervalued based on DCF assumptions.

The takeaway, according to this methodology, is that DNOW's underlying cash flow dynamics suggest there is substantial upside currently not priced in by the market.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for DNOW.

Our Discounted Cash Flow (DCF) analysis suggests DNOW is undervalued by 53.4%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: DNOW Price vs Earnings

The Price-to-Earnings (PE) ratio is often the go-to valuation tool for profitable companies like DNOW. This is because it gives a direct sense of how much investors are willing to pay today for a dollar of current earnings, helping to cut through noise and focus on what really matters: profit.

A company's fair PE ratio depends on more than just its profits. Factors such as expected earnings growth and business risk play a big role. Generally, higher growth and lower risk justify a higher PE, while slower growth or higher risk bring that number down. So, not all PE ratios are created equal.

DNOW's current PE ratio sits at 18.39x. For context, the Trade Distributors industry averages 21.61x and DNOW’s peer group averages 21.88x. At first glance, DNOW looks relatively cheap compared to its immediate competition.

But to dig deeper, we look at the Simply Wall St Fair Ratio, a proprietary metric that goes further than a peer or industry comparison by factoring in growth prospects, profit margins, company size, and unique risks. DNOW’s Fair PE Ratio is assessed at 21.75x, reflecting what investors might reasonably pay for a company with DNOW’s characteristics today.

Comparing the Fair Ratio to DNOW's actual PE, there is a sizable gap. The stock trades well below its fair value level. This suggests DNOW may be undervalued using this approach, offering potential upside for investors who think the market is overlooking the company’s strengths.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your DNOW Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative connects your perspective on a company with the numbers you believe in, tying together your story, assumptions for future revenue, earnings, margins, and ultimately your estimate of fair value. Think of Narratives as an accessible tool that lets you play out different scenarios and visualize their impact on DNOW's share price. All of this is available on Simply Wall St’s Community page, where millions of investors share and update their insights.

Narratives empower you to see at a glance whether DNOW looks undervalued or overpriced, based on the fair value from your forecast compared to today’s market price. Best of all, Narratives are dynamic and automatically update when new news or company results come in, keeping your analysis fresh and relevant. For example, one DNOW investor might set an optimistic Narrative, expecting strong revenue growth and margin expansion, which results in a high fair value. Another might be more cautious, seeing flat revenue and shrinking profits, and therefore a lower fair value. Narratives put your unique view at the center of the decision, helping you decide with confidence how to move forward.

Do you think there's more to the story for DNOW? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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