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Gold/Mining/Energy : Baker Hughes
BHI 0.0580+1.8%Jun 7 5:00 PM EST

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From: Dennis Roth7/30/2005 9:00:56 AM
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Baker Hughes (OP/A): Raising estimates and fair value to $77 = 36% upside
Goldman Sachs July 29, 2005

BHI 2Q2005 EPS of $0.64 beat our estimate and consensus of $0.53 with $0.04 attributable to unsustainably lower tax rate. Revenue and EBITDA were 4%/ 6% stronger than expected with year-over-year incremental margins of 38% only slightly below SLB and HAL despite no presence in pressure pumping (50-60% incrementals at this point in the cycle) and a 12% decline in Centrilift (second highest margins in BHI) caused in part by revenue slippage into 3Q2005. Performance in fluids and bits and completions appears to have outpaced competition with FEWD in line. We are raising our 2005-07 EPS estimates to $2.62/$3.45/$4.00 from $2.30/$2.80/$3.15 given stronger E&P spending trends and our fair value estimate to $77 (22.3x 2006E PE) from $62 = 36% upside potential. We reiterate our Outperform rating and Attractive coverage view.

HOW DOES BHI 2Q05 EPS PERFORMANCE STACK UP?

BHI year-over-year revenue grew 18% - slightly below the group average due to a difficult comp associated with very large ESP sales to Russia in 2Q2004 - while sequential growth was in line. Year-over-year EBIT margin grew 395 bps - also in line with the group and was +55bps our estimate. Y-y incremental margin of 38% was slightly below SLB and HAL's ~40% level, but was above SII, BJS, WFT.
Exhibit 1 - 2Q05 Revenue and EBIT trends - BHI vs peers

Quarterly Revenue seq chg y-y chg chg vs GS est
SLB (EX GECO) 9.8% 20.1% 6.1%
HAL (ESG) 13.1% 29.8% 6.4% BJS 2.7% 24.1% 1.8%
SII (ex distribution) 6.5% 23.0% 4.6%
WFT 9.3% 26.3% 5.4%
BHI 7.6% 18.4% 3.8%

Quarterly EBIT seq chg y-y chg chg vs GS est
SLB (EX GECO) 20.6% 48.5% 15.3%
HAL (ESG) 29.5% 94.1% 19.5% BJS 2.1% 54.4% 7.1%
SII (ex distribution) 5.8% 41.5% 2.9%
WFT 5.4% 54.3% -1.7%
BHI 11.8% 54.4% 7.3%

EBIT margins (bps) seq chg y-y chg chg vs GS est
SLB (EX GECO) 198 422 176
HAL (ESG) 267 700 231
BJS -11 394 99 SII (ex distribution) -9 197 -24
WFT -52 256 -101
BHI 64 395 56

Revenue/rig seq chg y-y chg chg vs GS est
SLB (EX GECO) 18.0% 6.0% 6.6%
HAL (ESG) 21.6% 14.6% 8.2%
BJS 10.4% 9.5% 2.3% SII (ex distribution) 14.4% 8.6% 5.1%
WFT 17.4% 11.5% 5.9%
BHI 15.6% 4.6% 4.3%
Company reports and Goldman Sachs Research estimates

I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
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