DA Davidson initiates Now stock with buy rating on energy outlook

DA Davidson initiated Now Inc (NYSE:DNOW) at Buy with a $17 price target, implying about 24% upside from the $13.70 share price and valuing the stock at roughly 10x 2027 EBITDA. The firm said ERP integration risk tied to about 40% of sales and a $400 million headwind is largely priced in, while elevated oil prices and LNG/power-demand tailwinds could support earnings. Q1 2026 results were mixed: EPS missed sharply at $0.01 versus $0.11 expected, but revenue beat at $1.18 billion versus $1.12 billion.

Analysis

This reads like a classic “bad-news-is-baked-in” setup where the market is still underappreciating operating leverage rather than headline earnings. The key second-order effect is that once the ERP drag becomes less of a visible overhang, management can shift investor focus from integration friction to cash conversion and capital returns, which matters more for a distributor with a repaired balance sheet than near-term EPS misses. If that narrative sticks, the multiple can rerate faster than fundamentals because the stock has been discounting a permanent impairment that may actually be temporary.

The more interesting catalyst is not oil itself, but the capex cycle behind gas infrastructure, LNG, and power buildout. DNOW is levered to a broad maintenance-and-expansion market where small share gains and better mix can create outsized EBITDA growth, especially if procurement and inventory discipline improve after the ERP transition. The balance-sheet strength also gives management a path to use buybacks as a volatility dampener, which can force a higher floor under the shares if free cash flow remains stable over the next 2-3 quarters.

The contrarian risk is that the market may be overestimating how quickly integration pain translates into normalized margins; distributors often suffer from delayed customer churn and hidden service-level issues that show up after the initial transition window. A second risk is that a weaker industrial demand backdrop or a pullback in oil narrows the perceived secular upside before the balance sheet story fully works through. In that scenario, the stock can de-rate back to a low-teens EBITDA multiple even if the long-term thesis is intact, because the market will pay for visibility, not optionality, until execution is proven.

Consensus may be missing that the real trade is less about DNOW’s end-market growth and more about the market reallocating from ‘execution-risk discount’ to ‘capital-returns premium.’ If management can demonstrate even modest stabilization in the ERP-affected business over the next two earnings prints, the combination of buybacks and narrative reset can produce a multi-month squeeze higher. Conversely, if revenue quality deteriorates while EPS remains choppy, the stock becomes a value trap with limited downside protection from the current setup.

Key Decisions for Investors

• Go long DNOW on post-earnings weakness or into a 1-2 quarter confirmation window; target a rerate toward the mid-teens if ERP drag stabilizes, with downside controlled by the balance sheet and buyback support.
• Use a call spread in DNOW (e.g., 6-9 month tenor) to express upside from a narrative reset while limiting premium outlay; best risk/reward if implied volatility stays contained after the recent mixed print.
• Pair trade: long DNOW / short a more expensive industrial distributor or energy-services proxy with weaker capital returns; thesis is that DNOW’s buyback capacity and balance-sheet optionality make it a cleaner recovery story.
• Reduce or avoid outright longs if the next quarter shows no improvement in operating execution; the main risk window is the next 1-2 earnings reports, where delayed ERP issues can overwhelm the valuation argument.
• If oil and LNG-linked names rally broadly, use DNOW as a higher-beta relative-value expression rather than a pure commodity bet; the stock’s upside is driven more by operating leverage and multiple expansion than by direct oil-price beta.