|Baker Hughes Inc. (BHI): Growth strategy still unclear - maintain Neutral rating - Goldman Sachs - April 23, 2008|
Baker Hughes reported 1Q2008 EPS of $1.21, which was $0.02 above our estimate and $0.01 above the Street estimate. The earnings beat was due to below-the-line items as a lower tax rate and lower share count contributed $0.04 and $0.02 to EPS. This more than offset 3% of lower than expected operating income due to lower margins in the Completions & Production segment associated with the decline in export sales. We made modest adjustments to our model, including changes to our Drilling and Evaluation and Completion and Production forecasts. Our 2008-2010 EPS estimates have changed by 1%, 1%, and 2%.
There is no change to our Neutral rating on BHI. We expected BHI’s growth to lag peers this quarter and it did just that - with North America revenue growth of 8% below peer growth of 10% and international growth of 8% below peer growth of 25%. We were hoping for more clarity on BHI’s strategy to reaccelerate revenue growth and close the gap on competitors, but we did not get that on the call. Without that, we think it will be hard for the stock to outperform.
Key takeaways from the call include:
(1) Pricing pressures appear less severe than last quarter, with some pockets of strength in Centrilift and Petrolite.
(2) Margins are likely to remain flattish for the remainder of the year - at a level lower than we originally expected, mainly due to rising costs.
(3) Revenue growth should gradually improve throughout the rest of the year, driven by Latin America, Russia, China and India.
BHI is trading at 2009E P/E of 13.1X versus SLB at 17.6X and HAL at 13.5X. Our 12-month price target of $79 (12.8x 2009E EPS) is unchanged.
Key risks include a sustained decline in commodity prices and the broader stock market indices.