Baker Hughes Inc. $BHI Quarterly Valuation – May 2014

Baker_Hughes_LogoBenjamin 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 5 Highest Dividend Yields Among Undervalued Defensive Companies.  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 specific look at how Baker Hughes Inc. (BHI) fares in the ModernGraham valuation model.

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. 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. In April 2014, the Company acquired Perfomix, Inc., a Texas-based oilfield software technology company focused on solutions to enhance oil and gas operations’ performance.

BHI Chart

BHI data by YCharts

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 = 5/5

  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 – PASS

Valuation Summary

Key Data:

Recent Price $68.71
MG Value $29.09
MG Opinion Overvalued
Value Based on 3% Growth $47.31
Value Based on 0% Growth $27.73
Market Implied Growth Rate 6.28%
Net Current Asset Value (NCAV) $2.68
PEmg 21.06
Current Ratio 2.49
PB Ratio 1.68

Balance Sheet – 3/31/2014

Current Assets $11,266,000,000
Current Liabilities $4,526,000,000
Total Debt $3,878,000,000
Total Assets $27,896,000,000
Intangible Assets $6,859,000,000
Total Liabilities $10,099,000,000
Outstanding Shares 435,980,000

Earnings Per Share

2014 (estimate) $4.03
2013 $2.47
2012 $2.97
2011 $3.97
2010 $2.06
2009 $1.35
2008 $5.30
2007 $4.73
2006 $7.21
2005 $2.56
2004 $1.57

Earnings Per Share – ModernGraham

2014 (estimate) $3.26
2013 $2.77
2012 $2.99
2011 $3.16
2010 $3.22
2009 $3.94

Dividend History

BHI Dividend Chart

BHI Dividend data by YCharts

Conclusion:

Baker Hughes is suitable for Enterprising Investors but not for Defensive Investors.  Defensive Investors have concerns with the lack of sufficient earnings growth over the last ten years as well as the high PEmg ratio.  The company passes all of the requirements of Enterprising Investors, though.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index.  From a valuation perspective, the company appears to be overvalued currently, after growing its EPSmg (normalized earnings) from $3.22 in 2010 to an estimated $3.26 for 2014.  This demonstrated level of growth does not support the market’s implied estimate of 6.28% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price at this time.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Baker Hughes Inc. (BHI)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Be sure to check out the previous ModernGraham valuations of Baker Hughes as well as dig through the Valuation Index to find other companies!

Disclaimer:  The author did not hold a position in Baker Hughes Inc. (BHI) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.


Posted

in

,

by

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.