Baker Hughes Inc.’s analysis versus peers uses the following peer-set: Schlumberger Limited. (NYSE:SLB), National-Oilwell Varco, Inc. (NYSE:NOV), Halliburton Company (NYSE:HAL), Cameron International Corporation (NYSE:CAM), Weatherford International Ltd (NYSE:WFT), Subsea 7 SA (PINK:SUBCY), Oceaneering International (NYSE:OII), Oil States International, Inc. (NYSE:OIS), Seacor Holdings, Inc. (NYSE:CKH) and Exterran Holdings, Inc. (NYSE:EXH). The table below shows the preliminary results along with the recent trend for revenues, net income and returns. You can also read CapitalCube’s recent Earnings Analysis for Halliburton Co. (HAL).
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 5,228.0 | 5,326.0 | 5,355.0 | 5,387.0 | 5,178.0 |
| Revenue Growth % | (1.8) | (0.5) | (0.6) | 4.0 | 9.2 |
| Net Income | 265.0 | 439.0 | 379.0 | 314.0 | 706.0 |
| Net Income Growth % | (39.6) | 15.8 | 20.7 | (55.5) | 108.9 |
| Net Margin % | 5.1 | 8.2 | 7.1 | 5.8 | 13.6 |
| ROE % (Annualized) | 6.3 | 10.7 | 9.5 | 8.0 | 18.5 |
| ROA % (Annualized) | 4.0 | 6.8 | 6.0 | 5.1 | 11.8 |
Valuation Drivers
Baker Hughes Inc. trades at a lower Price/Book multiple (1.2) than its peer median (2.5). The market expects BHI-US to grow earnings about as fast as the median of its chosen peers (PE of 14.1 compared to peer median of 16.4) but not to expect much improvement in its below peer median rates of return (ROE of 8.6% compared to the peer median ROE of 13.0%).
The company’s profit margins are below peer median (currently 6.6% vs. peer median of 10.2%) while its asset efficiency is about median (asset turns of 0.8x compared to peer median of 0.7x). BHI-US’s net margin is less than (but within one standard deviation of) its five-year average net margin of 9.4%.
Economic Moat
The company enjoys both better than peer median annual revenue growth of 37.6% and better than peer median earnings growth performance 114.2%. BHI-US currently converts every 1% of change in annual revenue into 3.0% of change in annual reported earnings. We view this company as a leader among its peers.
BHI-US’s return on assets is now less than its peer median (5.5% vs. peer median 8.1%) in contrast to its returns over the past five years which were around the peer median (9.4% vs. peer median 8.5%). Recent performance suggests that the company’s historical competitive advantage is slipping away.
The company’s gross margin of 27.3% is around peer median suggesting that BHI-US’s operations do not benefit from any differentiating pricing advantage. In addition, BHI-US’s pre-tax margin is less than the peer median (9.6% compared to 14.9%) suggesting relatively high operating costs.
Growth & Investment Strategy
While BHI-US’s revenues have grown faster than the peer median (18.7% vs. 9.0% respectively for the past three years), the market gives the stock an about peer median PE ratio of 14.1. This suggests that the market has some questions about the company’s long-term strategy.
BHI-US’s annualized rate of change in capital of 29.4% over the past three years is greater than the peer median of 19.0%. This relatively high investment has generated a less than peer median return on capital of 6.6% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.
Earnings Quality
BHI-US reported relatively weak net income margins for the last twelve months (6.6% vs. peer median of 10.2%). This weak margin performance and relatively conservative accrual policy (1.8% vs. peer median of 1.2%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.
BHI-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.
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