|In-line 3Q results, but margin guidance disappointing; Still Buy - Goldman Sachs - October 29, 2007|
We lowered our 2007/2008/2009 EPS for BHI to $4.76, $5.89, and $7.01 from $4.78/$6.15/$7.30, respectively. Our revisions reflect BHI’s more conservative outlook on incremental operating margins (~25%). Our 12-month price target is now $4 lower at $103 (13.0X 2008 EV/DACF).
There is no change to our Buy-rating on BHI shares, despite the lower-than-expected outlook on incremental margins. Our Buy rating on BHI has been based on aggressive penetration into international markets, improved stability in North America, and regaining of domestic market share. These investment themes have not changed, however the expected EPS benefits associated with them appear to be pushed out further than we expected. Valuation is still inexpensive, and we continue to recommend BHI, although we rank it behind Buy-rated WFT, DO, and NOV. Key takeaways include:
(1) Incremental margin improvement will be tempered by flat drilling activity in North America and a more challenging pricing environment, project startups, and additional international investment.
(2) BHI is “chasing” $10.5 billion of projects globally, with Statoil ($2 bn), Manifa ($1 bn) & Angola’s Block 31 ($1 bn) bid winner announcements expected shortly.
(3) BHI beat our estimates by 4% in North America and 7% in Latin America, but missed by 3% in Europe/CIS (delays in UK, lower Nigeria activity).
BHI is trading at 2008 EV-DACF/P-E of 11.3x/15.3x versus SLB at 14.9x/19.2x and HAL at 10.9x/14.6x.
Key risks include capacity additions, a sustained decline in commodity prices, and the broader stock market indices.