Up 25% in the Past 3 Months, is Baker Hughes Still a Buy?

Baker Hughes Company (BKR) in Houston, Tex., is an energy technology company that serves energy and industrial customers worldwide. It operates through four segments: Oilfield Services (OFS); Oilfield Equipment (OFE); Turbomachinery & Process Solutions (TPS); and Digital Solutions (DS). In addition, the company has a strategic collaboration with Air Products and Chemicals, Inc. to develop hydrogen compression systems.

The stock has surged 10.8% in price over the past month and 26.5% over the past three months to close yesterday’s trading session at $25.35, driven by investors’ optimism about the company’s differentiated AI-based technology solutions. However, the company’s lower-than-expected third-quarter results caused investors some concern. As a result, the stock fell 4% in price in early trading on Wednesday after its quarterly report delivered a negative earnings surprise.

The company’s $5.09 billion in third-quarter revenue fell short of the $5.34 billion consensus estimate, due to the current supply chain crisis and high raw material costs. These conditions could negatively impact the company’s share price in the near term.

Here’s what we think could influence BKR’s performance in the upcoming months:

Business Headwinds

On Wednesday, BKR announced quarterly earnings that fell short of analyst forecasts, owing to global supply chain concerns, sending the company's stock tumbling in early trading.

Though oil service companies were projected to benefit from the return of oil prices to pre-pandemic levels, increased material prices and interruptions in global supply chains are squeezing some companies' profits. In addition, Hurricane Ida, which halted operations on the U.S. Gulf Coast and Gulf of Mexico, negatively impacted BKR’s oil services unit.

Mixed Fundamentals

For its fiscal third quarter, ended September 30, 2021, BKR’s revenue increased marginally year-over-year to $5.09 billion. Its operating income came in at $378 million, compared to a $49 million operating loss in the prior-year period. The company reported $8 million in net income, compared to a $170 million net loss in the second quarter of 2020. However, its cash and cash equivalents declined 5% for the nine months ended September 30, 2020, to $3.93 billion. In addition, its revenue from its oilfield equipment segment declined 17% year-over-year to $603 million.

Stretched Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 34.59x, which is 175.3% higher than the 12.56x industry average. Also, its 18.41x forward EV/EBIT multiple is 35.33% higher than the 13.61x industry average. Moreover, ED’s 12.51x forward Price/Cashflow is 106.3% higher than the 6.07x industry average.

The stock’s 10.47x forward EV/EBITDA multiple is 28.7% higher than the 8.14x industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the 11 Wall Street analysts that have provided ratings for the stock, eight rated it Buy, and three rated it a Hold. The $29.10 average analyst price target represents a potential 14.8% upside. The price targets range from a low of $21.1 to a high of $36.

POWR Ratings Reflect Uncertainty

BKR has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BKR has a C grade for Value and Stability. The company’s higher-than-industry valuations are in sync with the Value grade. In addition, the stock’s 1.63 beta is consistent with the Stability grade.

Of the 89 stocks in the C-rated Energy – Oil & Gas industry, BKR is ranked #26.

Beyond what I’ve stated above, one can view BKR ratings for Growth, Sentiment, Momentum, and Quality here.

Bottom Line

BKR has exhibited solid momentum over the past few months. However, the company failed to beat consensus revenue and earnings estimates in the third-quarter earnings report. The supply chain crisis, coupled with the side effects of Hurricane Ida, which disrupted BKR’s business operations, is projected to further affect the company’s fundamentals in the near term. Thus, we believe investors should wait until BKR can dodge the short-term industry headwinds before investing in the stock.

How Does Baker Hughes Company (BKR) Stack Up Against its Peers?

While BKR has an overall C rating, one might want to consider looking at its industry peer, SilverBow Resources Inc. (SBOW), and Baytex Energy Corp. (BTEGF), which have  overall A (Strong Buy) ratings.

BKR shares rose $0.04 (+0.16%) in premarket trading Thursday. Year-to-date, BKR has gained 24.71%, versus a 22.00% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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