Baker Hughes, A GE Company: A Tuck-Away Investment

Summary

• The company reported Q3 2017 results that missed top- and bottom-line estimates.
• However, there were some positive takeaways from the company's quarterly results.
• BHGE shares are a long-term buy.

The new Baker Hughes, A GE company (BHGE) has failed to impress the market since being created in July of 2017, which is shown by the fact that shares are down by over 10% over the last three months.

(Source: Nasdaq)

The company's recent operating results did not help the bull case for BHGE shares, but, in my opinion, investors with a long-term perspective should at least consider adding this company to their watch lists.

(Image Source)

Results, Nothing To Brag About

On October 20, 2017, BHGE reported adjusted Q3 2017 EPS of $0.05 on revenues of $5.4B, which were top- and bottom-line misses. The macro environment continued to be a headwind for BHGE, and it showed in the numbers.

(Source: Q3 2017 Presentation)

The Oilfield Equipment segment saw revenues decline by 28% YoY and its operating income percentage decrease by 14.6 pts, as the subsea market continued to be a challenging environment. Furthermore, management mentioned during the conference call that they see "little sign of any significant recovery" for this industry through at least 2018. Therefore, investors should begin to bake in expectations for a long tough road ahead for this business.

The Digital Solutions segment - a key growth driver for the new BHGE - also had a rough quarter, as the business unit had YoY declines in both revenues and operating income. Looking forward, however, investors should be encouraged by the segment's impressive 43% YoY growth in orders. Mr. Lorenzo Simonelli, CEO, mentioned that the management team fully expects for the company's Digital Solutions segment to begin to stabilize and return to growth in the near term.

As bad as BHGE's quarterly results were, I believe that there are several reasons to be optimistic about the company's long-term business prospects. To start, the company reported encouraging order numbers and had several key contract wins during quarter.

To highlight just one of the wins, BHGE signed a Digital order worth ~$300MM. That may not seem like much, but let's remember that this is a high-margin business for the company. The impact of these agreements will not show up in BHGE's results in a material way over the next quarter or two but they most definitely bode well for the company's future prospects.

Another reason to be bullish about BHGE is the company's strong balance sheet. As of Q3 2017, BHGE had $4.7B in cash and only $1.9B in short-term debt obligations.

(Source: Q3 2017 Press Release)

The company's balance sheet strength will allow for it to weather any near-term storms while also investing in its business, something that cannot be said about many of BHGE's competitors.

Lastly, BHGE's parent company, General Electric (GE), recently released its quarterly results and announced that around $20B of assets would be either sold or spun off over the next two years. BHGE will likely be one of the first businesses that GE will dispose of, so, in my opinion, this will likely turn out to be a long-term catalyst for the stock.

There is no doubt that the company's earnings growth will largely come from management reducing expenses over at least the next year or so but I believe that BHGE shares are worth the risk if you are willing (and able) to hold on to shares for the next three-to-five years.

Bottom Line

The company's Q3 2017 results were nothing to brag about but let's remember that BHGE is operating in a very challenging environment, and the merger was completed only three short months ago. The large contract wins should be viewed as positive develops because the agreements will positively impact BHGE's results over the next few quarters.

I do not expect for BHGE to be a market-beater in 2017 (or 2018), but, in my opinion, the newly created company is worth a look for a long-term investment. With this being said, shares may continued to trend lower over the next few quarters so a better entry point may present itself in the near future. Therefore, I believe that investors should treat pullbacks as long-term buying opportunities.

Author's Note: I have a small BHGE position in the R.I.P. portfolio and I plan to add to the position when shares trade around the $31 range.

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Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long BHGE, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.