Baker Hughes Stock - Impressive Quarter Doesn't Make It A Buy Just Yet (NASDAQ - BKR) - Seeking Alpha

5/30/23, 3:31 PM Baker Hughes Stock _ Impressive Quarter Doesn’t Make It A Buy Just Yet (NASDAQ _ BKR) _ Seeking
’t Make It A Buy Just Yet (NASDAQ _ BKR) _ Seeking Alpha
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Baker Hughes: Impressive Quarter Doesn't Make It A Buy

Just Yet
May 27, 2023 12:21 AM ET | Baker Hughes Company (BKR) | 2 Comments | 3 Likes
MJ Investing
208 Followers
Summary
Baker Hughes Company is a solid bet for the long term, given the strong growth they have had and expect to
continue having.
The market they are in is volatile, but BKR seems to have been able to navigate it quite effectively.
What makes me rate it a hold though is the rich valuation and the alarming share dilution that has occurred
during the last few years.
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5/30/23, 3:31 PM Baker Hughes Stock _ Impressive Quarter Doesn’t Make It A Buy Just Yet (NASDAQ _ BKR) _ Seeking Alpha
bymuratdeniz
Investment Summary
Baker Hughes Company (NASDAQ:BKR) is a well-known global energy technology company operating in the oil and
gas industry. The company's diverse portfolio includes oilfield services, digital solutions, turbomachinery and process
solutions, and measurement and control solutions. In the oilfield services segment, Baker Hughes specializes in
drilling services, formation evaluation, well completion, and production optimization solutions.
Q1 Results (Investor Presentation)
The company came out with a great last report for investors as they were navigating a quite difficult macro
environment. Orders are up 12% YoY and revenues are 18% YoY is comforting to see. Looking ahead the company is
aware of the special environment we are in but also mentions they have a strong diversification that should help
weather volatility and uncertainty. Where I am worried about BKR is the dilution they have been performing. Shares
down 20% over the last 5 years and quite close to the top they had in April 2022 doesn't create a strong entry point
right now. Paying 18x forward earnings for a company in the oil and gas industry is quite rich. Going by the estimates
the current price could be at a fair multiple in 2027 if they grow the EPS accordingly. During that time I would much
rather be in a company that is buying back shares and has a realistic valuation. BKR is a hold for me.
Oil And Gas Will Stay With Us

Despite the negative comments I had at the beginning of the article I am confident that BKR will continue seeing both
growth and demand. The oil and gas industry won't leave us for a very long time. There is still way too much of a
dependency on it in our society. Where BKR benefits from this is that companies are still eager to start setting up
drilling projects and of course need equipment to do so, equipment that BKR helps provide.
Company Segments (Investor Presentation)
Looking at what BKR recognizes as reasons for growth, the US market is weakening and other regions are
presenting more growth potential instead. Present in 120+ countries, BKR has the position to start investing more in
offshore and international markets instead to help fuel further growth.
Looking ahead, BKR has a strong conviction about growing revenues despite oil prices falling and not nearly at the
same prices as 12 months ago. Margins aren't fantastic, but they seem to stabilize somewhat at least. The growth the
company is anticipating would be a major improvement from 2022 numbers, with around 20% top-line growth using
the higher end of the estimates. The company generates a massive amount of levered FCF, if they maintain the same
margins as in 2022 they could reach $2 billion in 2023.
Dividend & Buybacks (Investor Presentation)
Diverting 60 - 80% of FCF to shareholders would be a major benefit to owning shares in the company. The company
already has $4 billion in capital authorized to buy back shares, but it hasn't seen any use as shares are still
increasing. A stop in dilution and a start of the buyback program could be a catalyst for the share price and actually
justify the current valuation. But until then I think there is still some valid concern to be had about the actual effect of
the program.
The growth prospects are there for the company, but it's still left to see about the actual impact we might see from the
plan the management has set up. As mentioned, until then I will stay fast with my hold rating.
Quarterly Result
Looking at the first quarter to the start of the year, BKR had a fantastic start in my opinion. The company was able to
grow both orders and revenues in the double digits. But perhaps one of the main attractions for investors with BKR is
the cash flows they are generating. This quarter was no disappointment, $197 million was generated in the quarter.
Earnings Highlights (Earnings Report)
CEO Lorenzo Simonelli had an interesting remark about the market and the quarter, "Another notable characteristic
of this cycle is the continued shift towards the development of natural gas and LNG. As the world increasingly
recognizes the crucial role natural gas will play in the energy transition". This take is interesting and important to keep
in mind as it highlights some of the trends seen in the US natural gas market. Even though more electricity is being
generated through renewable means, natural gas consumption is still trending upwards as a necessity to help support
the need for housing in the US.
Company Outlook (Investor Presentation)
Looking at the coming quarter, revenues are expected to take a QoQ decline, but on a yearly basis, it would be an
impressive 23% YoY growth using the higher end of the estimates. This goes in line with the plan the company has to
deliver double-digit revenue growth for 2023. The risk for a drop in the share price I think will mainly come from a
failure to execute the plan the company has for 2023. Estimates are optimistic that BKR can be a sort of growth
company. Setbacks or lack of improvements in the margin I think would highlight why the current 18x forward
earnings might be too rich to pay.
Earnings Estimates (Seeking Alpha)
As mentioned before, the company is dedicating a large amount of FCF to dividends and buybacks, if the margins
aren't improving and revenues don't meet expectations I think the long-term value investors are getting here is greatly
lowered. For me, investing in BKR is a bet that you will get some appreciation from the shares and the company's
ability to grow the bottom line efficiently, but also strong buybacks and dividends, despite a volatile market
environment. I hope to see BKR invest heavily in foreign markets and offshore sites to benefit from the trend they
noticed in the last quarter.
Valuation & Wrap Up

I think that BKR is a very exciting opportunity in the oil and gas market. But paying 18x forward earnings even if the
company is estimated to have strong growth is just not viable given the industry they are in. They might be
distinguished a bit given the product they offer, but I think there is ample risk here that a strong correction could
happen if there is a slowdown in the growth or a miss in an earnings report.
Stock Chart (Seeking Alpha)
That's a risk I am not comfortable taking on and would rather wait on the sidelines until the valuation either comes
down, or the company is truly able to justify the valuation. Given the quality of the business and the strong balance
sheet, I will still be rating them a hold.
This article was written by
MJ Investing
208 Followers
I take a look at a variety of companies across several sectors. I like to dive deep and see what really makes a company a good investment compared
competitors. Creating a long-term portfolio and managing it is always the goal.
Show More
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72
hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a
particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US
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Comments (2) Sort by Newest
honestjohn1 27 May 2023, 11:27 AM

H
Comments (195) | + Follow
Why don't any analyst discuss their CTS tech and its' growth possibilities????
Reply Like
chris hauser 27 May 2023, 10:40 AM
Comments (956) | + Follow
great company, great history, difficult business.
Reply Like
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5/30/23, 3:31 PM Baker Hughes Stock _ Impressive Quarter Doesn’t Make It A Buy Just Yet (NASDAQ _ BKR) _ Seeking

’t Make It A Buy Just Yet (NASDAQ _ BKR) _ Seeking Alpha

Home Stock Ideas Quick Picks & Lists Energy

Baker Hughes: Impressive Quarter Doesn't Make It A Buy

Q1 Results (Investor Presentation)

Oil And Gas Will Stay With Us

Company Segments (Investor Presentation)

Dividend & Buybacks (Investor Presentation)

Earnings Highlights (Earnings Report)

Company Outlook (Investor Presentation)

Earnings Estimates (Seeking Alpha)

Valuation & Wrap Up

Stock Chart (Seeking Alpha)

This article was written by

any company whose stock is mentioned in this article.

Comments (2) Sort by Newest

honestjohn1 27 May 2023, 11:27 AM

chris hauser 27 May 2023, 10:40 AM

Comments (956) | + Follow

great company, great history, difficult business.

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