BHI Market Research & Analysis Report
Updated Sep 2, 2014

Growth and Balance Sheet

The company reported net income of $353 million, or 80 cents diluted earnings per share, for the second quarter of 2014 ending June 30. That's up from a net income of $240 million, or 54 cents diluted earnings per share for the same quarter last year. Revenues for the second quarter were $5,935 million, up from $5.487 million for the same quarter last year. In comparison to the same quarter last year, except for the Latin America sector, all the other sectors reported an increase in revenues. North America sector revenue was up 6.2% to $2,843 million, primarily due to newly introduced well construction and production technologies, such as Kymera hybrid drill bit and ProductionWave production solution; Latin America sector revenue was down 2.33% to $544 million; Europe/Asia/Russia Caspian sector revenue was up 10.35% to $1,066 million; Middle East/Asia Pacific sector revenue was up 18.33% to $1,149 million; and Industrial Services sector revenue was up 5.38% to $333 million. Gross profit margin for the quarter was 20.05% in comparison to 16.33% for the same period last year. Operating profit margin for the second quarter of 2014 was 10.63%, in comparison to 7.95% for the same quarter last year, the increase is primarily due to improved execution and rapid deployment of innovative new products and services. Cash flow provided by operating activities for the first six months of 2014 was $696 million, in comparison to $1,078 million for the same period last year. Cash and cash equivalents as of June 30, 2014 were $1,163 million in comparison to $1,399 million as of December 31, 2013. BHI forecasted third quarter of 2014 EPS are in the range of $1.12 to $1.27, compared to actual EPS of 77 cent for the third quarter of 2013. The financial strength indicators of the company are all at satisfactory levels. Company’s current ratio of 2.51 is better than the industry average of 1.70. Moreover, the quick ratio of 1.63 is also at healthier levels than the industry average of 1.13. The interest coverage ratio of 8.22 is much better than the industry average of -21.47. In terms of efficiency, the asset turnover ratio of 0.84 is better than the industry average of 0.74; the receivables turnover ratio of 4.42 is lagging behind the industry average of 18.57; and the ROE of 7.16% is lagging behind the industry average of 10.20%.

Valuation

BHI PE stands at 24.08 above the industry average of 20.24, and above the stock market average represented by the S&P 500 average of 19.19. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 9.37x to 45.21x trailing 12-month earnings. BHI's current Price/Sales of 1.29 is below the average of its industry of 1.55. BHI’s head to head comparison to its main competitors shows that the company has second lowest gross margin in comparison to the selected peers, and one that is below the industry average. The achieved operating margin is better than WFT, but much below HAL and SLB gross margins, and above the industry average operating margin. The quarterly revenue growth of the company is close to HAL and SLB, but below the industry average. BHI trades at higher P/E and P/S ratio in comparison to the competitors, but with lower (better) PEG ratio, the higher valuation ratio might be justified. BHI’s twelve trailing months EBITDA is $4.08 billion, above the industry average of $78.46 million. The stock is currently trading below its intrinsic value of $75.35, this suggests that the stock is currently undervalued at these levels. The beta of 1.84 implies higher volatility of the stock with respect to the S&P 500. BHI has not shown favorable earnings consistency over the last five years. However, its earnings have grown by 12.68% over the last five years. The current quarter earnings in comparison to the same quarter last year have increased by 48.15%. BHI’s Total Debt/Equity of 25.26 is above the required maximum, but it is below the industry average of 58.48. BHI’s current price levels are below the maximum level, 8.59% below the 52 week high of $75.64, and the technical analysis give a neutral to positive view of the stock. The majority of the analyst ratings are outperform. BHI has a dividend payout ratio of 21% and a trailing annual dividend yield of 0.90%.

About BHI

Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. Baker Hughes is a supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. The Company may conduct its operations through subsidiaries, affiliates, ventures and alliances. It operates in more than 80 countries worldwide. The Company operates in five segments. Four of these segments represent its oilfield operations and their geographic organization: North America (U.S. Land, Gulf of Mexico and Canada), Latin America, Europe/Africa/Russia Caspian and Middle East/Asia Pacific. Its Industrial Services and Other segment includes downstream chemicals, process and pipeline services, and the reservoir development services group. In April 2014, the Company acquired Perfomix, Inc., a Texas-based oilfield software technology company focused on solutions to enhance oil and gas operations' performance.

Competitor Comparison

Baker Hughes Incorporated (NYSE:BHI) N.V.

Highlights

Baker Hughes Incorporated supplies oilfield services, products, technology, and systems to the oil and natural gas industry worldwide. The stock closed yesterday’s trading session at $69.14. In the past year, the stock has hit a 52-week low of $46.57 and 52-week high of $75.64. The intrinsic value of the stock is above the current price. BHI has a market cap of $30.08 billion and is part of the Basic Materials sector.

• Wide product and service portfolio 
• Strong R&D
• Diverse geographical presence

• Cost of environmental hazards   

BHI Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. BHI's 52 week high is $75.64, current price is $69.14, is 8.59% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.  The company has a P/E ratio of 24.08 the average industry P/E ratio is 20.24 and is above the S&P 500 P/E ratio of 19.19.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 0.29% of BHI stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

BHI is trading in the range of $66.75 - $70.11 in the past 30 days. The stock has been showing support around the level of $67 and resistance in the $75 range. The stock is trading below the 50-Day Moving Average but above the 200-Day Moving Average. The RSI(14) is 53.20. After the strong surge that stated early in 2014, the stock lost steam towards the end of July. It seems that the stock has found support around the level of $68, a previous resistance level – now turned support. The MACD indicator further confirms that the price contraction is over. A close above the psychological level of $70 would be a further confirmation that the bears are done with the stock for now. Also there is a wedge forming, which can be a continuation or reversal pattern, and it is something to be watched out for. Our indicators give a neutral to positive view of BHI.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 9 Buy, 10 Outperform, and 9 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. BHI’s annual EPS for the last 5 years were 1.36, 2.06, 3.97, 2.97, and 2.47 this type of earnings action is not favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. BHI’s Total Debt/Equity of 25.26 is above the required maximum, but it is below the industry average of 58.48.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. BHI’s EPS growth for this quarter relative to the same quarter a year earlier is 48.15%, above our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. BHI’s annual earnings growth rate over the past five years is 12.68%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.