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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 Roth4/26/2007 8:18:22 AM
   of 18
 
Turnaround still has legs; Raising estimates – Reiterate Buy April 26, 2007 - Goldman Sachs

What's changed

Baker Hughes posted strong 1Q07 results. We raised our 2007/2008 EPS forecasts by $0.18/$0.19 to $4.92/$5.84. We also raised our 12-month price target by $2 to $84 (12.5x 2007 EV/DACF) based on higher estimates.

Implications

We reiterate our Buy rating for Baker Hughes shares. The solid 1Q07 operating performance demonstrates that the company is making progress in terms of execution after two very disappointing quarters. We still believe there is room for further margin expansion and we see upside potential to our revised estimates and to company guidance if execution continues to improve over the coming quarters. The compounded impact of upwards EPS revisions and multiple expansion should lead to outperformance relative to the group over the next several months.

Valuation

Even after Wednesday’s rally, Baker Hughes is still trading at a discount to peers. For instance, in terms of 2007 EV-DACF/P-E Schlumberger is trading at a 24%/21% premium to Baker Hughes versus historic (versus historic ~12%/~14%). Baker Hughes is trading at a 2007 EV-DACF/P-E of 11.7X/15.9X, versus 12.6X/16.2X for Halliburton and 14.5X/19.3X for Schlumberger.

Key risks

Key risks to our thesis include: (1) A U.S./Global recession could result in weaker commodity prices and further E&P capex cuts; and (2) Weakness in natural gas prices could lead to further E&P capex cuts in North America.
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