|Baker Hughes (OP/A): We view weakness as a buying opportunity - Goldman Sachs - October 28, 2005|
BHI recurring 3Q2005 EPS ex-hurricane of $0.70 (reported = $0.65) was above our estimate of $0.69 + consensus of $0.67 due to lower tax rate. Oilfield revenue was 1% below our estimate (weaker Russia), but operating income was 1% higher (stronger drill bits). Incremental margins ex-hurricane were an impressive 44% yoy/ 63% seq + suggest 4Q2005 EPS guidance of $0.70-0.72 (low-30% incrementals) is conservative as pricing is accelerating. We are raising our 2006-07 EPS estimates to $3.50/ $4.15 from $3.45/ $4.00 given our higher E&P spending forecast (+20% vs +15% previously), but lowering our 2005 EPS estimate to $2.56 from $2.62 for hurricane impact. Our fair value of $78 (22.3x 2006 PE) implies 40-45% upside and we'd use any weakness in the shares to add to positions. Yesterday's share repurchase announcement suggests mgt agrees with our view.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Terry Darling; Jerry Revich.