Baker Hughes Is A Sell For 2 Reasons

Summary

• BKR reports earnings January 22nd.
• Its Q3 revenue declined. EBITDA grew, aided by cost containment efforts.
• GE owns a sizeable stake in BKR. I expect GE to continue to sell down its stake, which could pressure the shares.
• BKR trades at 10x trailing EBITDA, robust for a cyclical name.
• Sell BKR into earnings.

Source: Bloomberg

Baker Hughes (NASDAQ:BKR) reports quarterly earnings January 22nd. Analysts expect revenue of $6.48 billion and EPS of $0.31. The revenue estimate implies double-digit growth sequentially. Investors should focus on the following key items.

More Stagnation In North America?

I have been bearish on the global economy for years. I have specifically avoided cyclical names like Baker Hughes. OPEC supply cuts have buoyed oil prices and spurred E&P. Things may have changed in Q4 2018 when shale oil plays began to suffer budget exhaustion, hurting E&P in the oil patch. In Q3 2019, Baker Hughes reported revenue of $5.9 billion, down 2% Q/Q.

North America land drilling has been the hottest market for oil services firms, and it remains in focus. Halliburton's (HAL) revenue from North America fell by double digits. Schlumberger's (SLB) revenue in the region grew 2%, not via land drilling activity, but by offshore sales.

Baker Hughes's short cycle businesses are comprised of Oilfield Services and Digital Solutions. The company generated combined $4.0 billion in revenue from these segments, up 2% sequentially. They represented over 65% of Baker Hughes's total revenue, so their performance will likely have an out-sized impact on the company's total results.

The U.S. rig count has been stagnant to declining for most of the year. Active drilling rigs in the U.S. fell by 8 last week, suggesting headwinds still exist in the oil patch. November industrial production rose, yet it has been stagnant for much of 2019; until it shows consistent traction it could be a bad sign for the economy and North America E&P.

Turbomachinery revenue was $1.2 billion, down by double digits. Baker Hughes sold its high-speed reciprocating compressor business and natural gas solutions business; the sale may have had a negative impact on Turbomachinery's top line growth. Oilfield Equipment revenue grew in the mid-single-digit

Analyst’s Disclosure:I am/we are short 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.