Oil & Gas Stocks

Baker Hughes Inc Valuation – July 2016 $BHI

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Baker Hughes Inc (BHI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Baker Hughes Incorporated is engaged in the oilfield services industry. The Company is a supplier of oilfield services, products, technology and systems used in the oil and natural gas industry around the world. The Company also provides industrial products and services for other businesses, including downstream chemicals, and process and pipeline services. It conducts its operations through its subsidiaries, affiliates, ventures and alliances. The Company has four geographical operating segments: North America, Latin America, Europe/Africa/Russia Caspian and Middle East/Asia Pacific. The Company also has an Industrial Services segment, which includes the downstream chemicals business and the process and pipeline services business. The Company’s oilfield products and services are of approximately two categories, Drilling and Evaluation or Completion and Production. The Company’s Industrial Services consists of its downstream chemicals and process, and pipeline services businesses.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of BHI – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $19,977,659,093 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.56 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -132.13% Fail
6. Moderate PEmg Ratio PEmg < 20 -48.61 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.28 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.56 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.62 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

BHI value chart July 2016

EPSmg -$0.92
MG Growth Estimate -4.25%
MG Value $2.61
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth -$13.28
MG Value based on 0% Growth -$7.79
Market Implied Growth Rate -28.56%
Current Price $44.53
% of Intrinsic Value 1705.57%

Baker Hughes Incorporated does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3 in 2012 to an estimated $-0.92 for 2016. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Baker Hughes Incorporated scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

BHI charts July 2016

Net Current Asset Value (NCAV) $2.61
Graham Number $0.00
PEmg -48.61
Current Ratio 3.56
PB Ratio 1.28
Current Dividend $0.68
Dividend Yield 1.53%
Number of Consecutive Years of Dividend Growth 3

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $8,771,000,000
Total Current Liabilities $2,462,000,000
Long-Term Debt $3,885,000,000
Total Assets $22,936,000,000
Intangible Assets $6,623,000,000
Total Liabilities $7,617,000,000
Shares Outstanding (Diluted Average) 442,000,000

Earnings Per Share History

Next Fiscal Year Estimate -$3.09
Dec2015 -$4.49
Dec2014 $3.92
Dec2013 $2.47
Dec2012 $2.97
Dec2011 $3.97
Dec2010 $2.06
Dec2009 $1.36
Dec2008 $5.30
Dec2007 $4.73
Dec2006 $7.27
Dec2005 $2.57
Dec2004 $1.58
Dec2003 $0.38
Dec2002 $0.50
Dec2001 $1.30
Dec2000 $0.31
Dec1999 $0.10
Dec1998 -$0.92
Sep1997 $0.63
Sep1996 $1.23

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate -$0.92
Dec2015 $0.70
Dec2014 $3.23
Dec2013 $2.77
Dec2012 $3.00
Dec2011 $3.17
Dec2010 $3.22
Dec2009 $3.95
Dec2008 $4.93
Dec2007 $4.27
Dec2006 $3.51
Dec2005 $1.51
Dec2004 $0.92
Dec2003 $0.57
Dec2002 $0.53
Dec2001 $0.46
Dec2000 $0.11

Recommended Reading:

Other ModernGraham posts about the company

Baker Hughes Stock Analysis – 2015 Annual Update $BHI
28 Companies in the Spotlight This Week – 2/28/15
Baker Hughes Inc. Quarterly Valuation – February 2015 $BHI
26 Companies in the Spotlight This Week – 11/22/14
Baker Hughes Inc. Quarterly Valuation – November 2014 $BHI

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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