We are reiterating our Neutral recommendation on Baker Hughes Inc. (BHI), as we believe the stock will perform in line with the broader market.
Baker Hughes reported strong fourth-quarter 2010 results; however, our concern related to the company’s international margin keeps us on the sidelines.
Last quarter, Baker Hughes reported a nearly three-fold jump in per share profit and beat our expectation. The improvement was due mainly to the ongoing strength of customer spending in unconventional oil and gas plays as well as price realization. Of Baker Hughes’ total quarterly revenue, North America accounted for 50%, while Europe/Africa/Russia/Caspian accounted for 18%, Middle East/Asia-Pacific was 15% and Latin America was 11%. The remaining was generated by Industrial and Others segments.
Specifically, North America registered a significant improvement in operating profit during the quarter. Profit before-tax margin in this region stood at 22%, compared with 9% in the year-earlier quarter. Given the growth of unconventional gas and oil-directed drilling in the U.S., Baker Hughes sees North America as the key potential area.
With a significant improvement in activity levels both in North America and internationally, Baker Hughes remains best positioned. The company’s acquisition of BJ Services is also expected to benefit its shareholders by integrating the acquired company’s product line (such as pressure pumping) with its wide array of products and services.
However, we remain apprehensive about the company’s performance related to the international margin versus its peers. On the other hand, management remains optimistic and stated that international margins could exit 2011 at around 15%. Its international operations reported substantial sequential margin improvement (up 375 basis points) in the fourth quarter of 2010, mainly on account of cost reductions associated with the company’s international restructuring and divestiture of unprofitable assets.
Although the company experienced substantial margin improvement sequentially in the fourth quarter,it still remains below peers. Its international margin jumped sequentially from 5.3% to 9.1% in the quarter, versus competitors’ margins in the 15–20% range internationally. Hence, we believe that the company is still in the growth phase of its international expansion, and lags its peers overseas.
Further, we remain cautious about delayed permits for deepwater and shelf drilling in the Gulf of Mexico region. The company also faces tough competition from Schlumberger Ltd. (SLB) and Halliburton Co. (HAL).
The company also holds a Zacks #3 Rank (short-term Hold rating) indicating no clear directional pressure on the shares over the near term.
BAKER-HUGHES (BHI): Free Stock Analysis Report
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SCHLUMBERGER LT (SLB): Free Stock Analysis Report
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