Earnings Analysis: Baker Hughes Inc.

| About: Baker Hughes (BHI)

Baker Hughes Inc. (NYSE:BHI) reports preliminary financial results for the quarter ended 2012-09-30.

Baker Hughes Inc. recently reported its preliminary financial results, based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Baker Hughes Inc.'s analysis versus peers uses the following peer-set: Schlumberger Ltd. (NYSE:SLB), National Oilwell Varco Inc. (NYSE:NOV), Halliburton Co. (NYSE:HAL)*, Cameron International Corp. (NYSE:CAM), Weatherford International Ltd. (NYSE:WFT), Subsea 7 SA Spon ADR (OTCPK:SUBCY), Oceaneering International Inc. (NYSE:OII), Oil States International Inc. (NYSE:OIS), SEACOR Holdings Inc. (NYSE:CKH) and Exterran Holdings Inc. (EXH). The table below shows the preliminary results, along with the recent trends for revenues, net income and returns.

*For our recent earnings analysis on Halliburton Co. click here.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 5,228.0 5,326.0 5,355.0 5,387.0 5,178.0
Revenue Growth % (1.8) (0.5) (0.6) 4.0 9.2
Net Income 265.0 439.0 379.0 314.0 706.0
Net Income Growth % (39.6) 15.8 20.7 (55.5) 108.9
Net Margin % 5.1 8.2 7.1 5.8 13.6
ROE % (Annualized) 6.3 10.7 9.5 8.0 18.5
ROA % (Annualized) 4.0 6.8 6.0 5.1 11.8

Valuation Drivers

Baker Hughes Inc. trades at a lower Price/Book multiple (1.2) than its peer median (2.5). The market expects Baker Hughes Inc. to grow earnings about as fast as the median of its chosen peers (PE of 14.1 compared to peer median of 16.4), but not to expect much improvement in its below peer median rates of return (ROE of 8.6% compared to the peer median ROE of 13.0%).

The company's profit margins are below peer median (currently 6.6% vs. peer median of 10.2%), while its asset efficiency is about median (asset turns of 0.8x compared to peer median of 0.7x). Baker Hughes Inc.'s net margin is less than (but within one standard deviation of) its five-year average net margin of 9.4%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 37.6%, and better than peer median earnings growth performance 114.2%. Baker Hughes Inc. currently converts every 1% of change in annual revenue into 3.0% of change in annual reported earnings. We view this company as a leader among its peers.

Baker Hughes Inc.'s return on assets is now less than its peer median (5.5% vs. peer median 8.1%) in contrast to its returns over the past five years, which were around the peer median (9.4% vs. peer median 8.5%). Recent performance suggests that the company's historical competitive advantage is slipping away.

The company's gross margin of 27.3% is around peer median, suggesting that Baker Hughes Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Baker Hughes Inc.'s pre-tax margin is less than the peer median (9.6% compared to 14.9%), suggesting relatively high operating costs.

Growth And Investment Strategy

While Baker Hughes Inc.'s revenues have grown faster than the peer median (18.7% vs. 9.0%, respectively for the past three years), the market gives the stock an about peer median PE ratio of 14.1. This suggests that the market has some questions about the company's long-term strategy.

Baker Hughes Inc.'s annualized rate of change in capital of 29.4% over the past three years is greater than the peer median of 19.0%. This relatively high investment has generated a less than peer median return on capital of 6.6% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

Earnings Quality

Baker Hughes Inc. reported relatively weak net income margins for the last 12 months (6.6% vs. peer median of 10.2%). This weak margin performance and relatively conservative accrual policy (1.8% vs. peer median of 1.2%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Baker Hughes Inc.'s accruals over the last 12 months are around zero. However, this modestly positive level is also greater than the peer median, which suggests some amount of building of reserves.

Trend Charts

Company Profile

Baker Hughes, Inc. 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 process and pipeline industries. Baker Hughes was founded in April 1987 and is headquartered in Houston, TX.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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