Valuation: Baker Hughes Inc. (BHI)
Company Profile:Â Baker Hughes Inc. (BHI) (obtained via Google Finance)
Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. The Company is a supplier of products, and technology services and systems to the worldwide oil and natural gas industry, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. The Company operates through two segments: the Drilling and Evaluation segment, and the Completion and Production segment. The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drilling and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells. The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift (electrical submersible pumps and progressing cavity pumps) divisions and the ProductionQuest (production optimization and permanent monitoring) business unit. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells. In April 2008, the Company acquired two reservoir consulting firms, Gaffney, Cline & Associates (GCA) and GeoMechanics International (GMI).
Business and Management ReviewÂ
1) Is the business simple and understandable?
This company works in two segments the drilling and Evaluation Segment, and the Completion and Production Segment. The former is mainly the provider of drilling fluids, completion fluids and fluids environmental services. Baker Hughes Drilling Fluidsâ€™ drill-in or completion fluids possess properties that minimize formation damage. The Drilling and Evaluation Segment also provides equipment and services to separate the drill cuttings from the drilling fluids and re-inject the processed cuttings into specially prepared wells, or to transport and dispose of the cuttings by other means. On the other hand, the Completion and Production Segment include liner hangers, multilateral completion systems and expandable metal technology. This line of business is understandable since it mainly deals with the oil and gas drilling process.
Â 2) Does the business have a consistent operating history?
Most stocks in the oil & gas services industry have seen rapidly growing revenue and earnings over the past three years. This stock has been no exception as far as top-line growth is concerned–its revenues have grown very rapidly over the past three years, though growth has been slower in the past 12 months. Like its peers, this stock’s earnings per share have grown at a very high rate over past three years, though they actually declined last year. Note that this stock’s sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. That means that the company will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate.
3) Does the business have favorable long term prospects?
Most companies in the oil & gas services industry have generated very high returns on assets over the past five years. What’s more, over the long haul, this company has posted results that are some of its industry’s best. Note that the company’s net profit margins–another key profitability measure–have been average compared with other companies in its industry.
Moreover, this stock has a low dividend yield, even compared with other stocks in its low-yielding industry. Low dividend yields are typically associated with young companies or companies with considerable growth opportunities. Sometimes even mature companies opt to buy back stock rather than pay dividends, though, because that is more tax efficient for shareholders. Note that this stock’s dividend has risen over the past five years. That is often a sign of financial vigor.
4) Is management rational?
There is doubt on the management rationality as Mr. Chad Beaton holds the Chairman, President and CEO position of the company, which threats the independency of BHI. However, the company has been wisely run.
Â 5) Is management candid with its shareholders?
BHIâ€™s website investor relations page contains useful information for investors as they track the performance of this company.
Â Â Financial and Value Review
1) Size of firm
The market cap of BHI is $27.18 billion.Â â€œPassâ€.
Â 2) Strong financial condition
The companyâ€™s current ratio is 2.79, which show us the availability of cash or other liquid instruments to cover their short-term debts. â€œPassâ€
Â 3) Earnings stability
BHI has not maintained a consistently positive Net Income for the past 10 years. â€œFailsâ€
Â 4) Dividend record
This company has consistently paid a dividend for over 10 years.Â â€œPassâ€
Â 5) Earnings growth
The earnings of this company has not grown enough to be more than 1/3 over 10 years.Â â€œFailsâ€
Â 6) Price to earnings analysis
With a PE ratio of 18.79 this company has passed this test. â€œPassâ€
Â 7) Price to assets analysis
BHI has a PB ratio of 4.39 and a PB*PE ratio of 82.3002, therefore this company does not pass the guidelines (our Methods) that we follow in our analysis. â€œFailâ€ / â€œFailâ€
Having failed 4 of the 8 tests we will not consider this company to be suitable for defensive investors.
Â Â Enterprising:
1) Strong financial condition
This company current ratio is above 1.5 and its debt to Net Current Asset is lower than 1.1. â€œPassâ€ / â€œPassâ€
Â 2) Earnings stability
The company has achieved a positive net income for over 5 years.Â â€œPassâ€
Â 3) Dividend record
The company pays dividend nowadays.Â â€œPassâ€
Â 4) Earnings growth
Earnings are greater today than they were 5 years ago.Â â€œPassâ€
The price is not less than 150% of the net tangible assets.Â â€œFailâ€
Having passed 5 out of 6 tests for the enterprising investor, we feel that Baker Hughes Inc. may be suitable for the enterprising investor following Benjamin Grahamâ€™s intelligent investor guidelines.
Our valuation model finds BHI to be overvalued at $84.43.
Since the company is currently trading at about $88.40, we feel it is overvaluedÂ and toÂ be not a suitable investment for the defensive or enterprising investor.
What is your opinion?Â Do you agree or disagree?Â How do you feel about Baker Hughes Inc.?Â Please let us know by leaving a comment. None of the staff of ModernGraham.com held a position in BHI at the time of publication.Â Also, please read our disclaimer and Our Methods.
One thought on “Valuation: Baker Hughes Inc. (BHI)”
What are the the tests you do exactly? For example, the Pass/Fail tests that you discuss here. You only say Pass/Fail, rather than say what the test actually is. I’ve looked at the Our Methods page and it doesn’t say what they actually are. If I wanted to duplicate your analysis on another company, I wouldn’t know what to do.
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