ModernGraham Valuation: Baker Hughes (BHI)


Company Profile (obtained from Google Finance): Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. Baker Hughes is a supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. It also provides industrial and other products and services to the downstream refining, and the process and pipeline industries. The Company may conduct its operations through subsidiaries, affiliates, ventures and alliances. It operates in more than 80 countries worldwide. The Company operates in five segments. Four of these segments represent its oilfield operations and their geographic organization: North America (U.S. Land, Gulf of Mexico and Canada), Latin America, Europe/Africa/Russia Caspian and Middle East/Asia Pacific. Its Industrial Services and Other segment includes downstream chemicals, process and pipeline services, and the reservoir development services group.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $1
MG Opinion Overvalued
Value Based on 3% Growth $42
Value Based on 0% Growth $24
Market Implied Growth Rate 5.85%
Net Current Asset Value (NCAV) $2.77
PEmg 20.20
Current Ratio 2.45
PB Ratio 1.44

Balance Sheet – 9/30/2013 

Current Assets $11,507,000,000
Current Liabilities $4,699,000,000
Total Debt $3,838,000,000
Total Assets $28,074,000,000
Intangible Assets $6,882,000,000
Total Liabilities $10,278,000,000
Outstanding Shares 443,230,000

Earnings Per Share – Diluted

2013 (estimate) $2.72
2012 $2.99
2011 $3.98
2010 $2.07
2009 $1.35
2008 $5.30
2007 $4.73
2006 $7.21
2005 $2.56
2004 $1.57
2003 $0.54
2002 $0.67

Earnings Per Share – Modern Graham

2013 (estimate) $2.87
2012 $3.01
2011 $3.17
2010 $3.22
2009 $3.94
2008 $4.92


Baker Hughes is disappointing due to poor earnings trajectory over the last 10 years.  The company’s financials are very strong and its dividend history is good.  Unfortunately, the company’s EPSmg (normalized earnings) have shrunk each year for the last 6 years, dropping from $4.92 in 2008 to an estimated $2.87 for 2013.  This consistent drop in earnings results in the company not passing the tests for the Defensive Investor.  However, the company’s financials are strong enough for the Enterprising Investor, who may be willing to take on more risk than his Defensive Investor friend.  From a valuation perspective, the company’s poor earnings history causes the ModernGraham valuation model to look negatively upon it.  The growth to be expected based on its historical results is surely less than the 5.85% implied by the market.  As a result, Enterprising Investors considering adding Baker Hughes to a portfolio should be very careful and do considerable research while keeping in mind the 7 Key Tips to Value Investing.

What do you think?  Is Baker Hughes overvalued?  Is the company suitable for only Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Baker Hughes at the time of publication and had no intention of entering into a position in the next 72 hours.

Photo Credit:  Andrew Magill





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