by muratdeniz
Investment summary
Baker Hughes Corporation (Nasdaq: BKR) is a well-known global energy technology company operating in the oil and gas industry. The company’s diversified portfolio includes oilfield services, digital solutions, turbomachinery and process solutions, and measurement and control solutions. In the oilfield services sector, Baker Hughes specializes in drilling services, formation appraisal, well completion and production optimization solutions.
First Quarter Results (Investor Presentation)
The company came out with a great recent report for investors as they were navigating a very challenging macro environment. Orders are up 12% year-over-year and revenue is up 18% year-over-year, which is a relief. Looking ahead, the company recognizes the particular environment we live in but also mentions that it has strong versatility that should help with the vagaries of weather and uncertainty. What worries me about BKR is the dilution they’ve been doing. Share 20% more The past five years and so close to the peak I made in April 2022 are not a strong entry point at the moment. paying off 18x forward The profits of a company in the oil and gas industry are very rich. go by estimates The current price could be at a fair multiple in 2027 if they develop EPS accordingly. During that time, I’d much rather be in a company that buys back shares and has a realistic valuation. BKR is holding for me.
Oil and gas will stay with us
Despite the negative comments I received at the beginning of the article, I am confident that BKR will continue to see both growth and demand. The oil and gas industry will not leave us for very long. There is still a lot to rely on in our society. Where BKR benefits from this is that companies are still eager to start constructing drilling projects and of course they need equipment to do that, equipment that BKR is helping to provide.
Company Sectors (Investor Presentation)
Given what BKR sees as reasons for growth, the US market is weakening and other regions offer more growth potential instead. Present in more than 120 countries, BKR is positioned to start investing more in overseas and international markets instead to help drive growth.
Looking ahead, BKR has strong conviction about revenue growth despite lower oil prices and not nearly the same prices as they were 12 months ago. The margins aren’t great, but they seem to be stabilizing at least somewhat. The growth the company expects will be a significant improvement over its 2022 numbers, with growth of about 20% using the upper end of estimates. The company generates a huge amount of leveraged money that, if it maintains the same margins as in 2022, could reach $2 billion in 2023.
Dividends and Buybacks (Investor Show)
Transferring 60-80% of the conditioning to the shareholders will be a huge benefit of owning shares in the company. The company already has $4 billion in authorized capital to buy back shares, but it hasn’t seen any use because the shares are still building up. A cessation in dilution and initiation of a buyback program could be a catalyst for the share price and actually justify the current valuation. But even then I think there is still some valid concern about the actual impact of the program.
Growth prospects are there for the company, but it remains to be seen what actual impact we might see from the plan laid out by management. As mentioned, until then I’ll stay fast with my pending rating.
Quarterly result
Looking at the first quarter of the year, BKR was off to a great start in my opinion. The company was able to increase orders and revenue by double digits. But perhaps one of the main attractions for investors using BKR is the cash flow they generate. This quarter was not a disappointment, $197 million was generated in the quarter.
Earnings Highlights (Earnings Report)
CEO Lorenzo Simonelli had an interesting note about the market and the quarter, “Another notable feature of this cycle is the continued shift towards the development of natural gas and LNG. As the world increasingly recognizes the critical role that natural gas will play in the energy transition.” This is interesting and important to keep in mind as it highlights some of the trends that have been seen in the US natural gas market. Although more electricity is being generated through renewable means, natural gas consumption continues to trend upward as a necessity to help support the housing need in the United States.
Company Overview (Investor Presentation)
Looking into the next quarter, revenue is expected to take a quarter-over-quarter decline, but year-over-year, it would be an impressive 23% year-over-year growth using the higher end of estimates. This is in line with the plan that the company should achieve double-digit revenue growth for 2023. I believe that the risk of a decline in the share price will mainly result from the failure to implement the plan that the company has set for 2023. Estimates are optimistic that BKR can be a type of growth company . I think the setbacks or lack of margin improvements would shed light on why the current 18x forward earnings are too rich to pay.
Earnings Estimates (look for alpha)
As mentioned earlier, the company allocates quite a bit of cash savings to dividends and buybacks, if margins don’t improve and revenue doesn’t meet expectations, I think the long-term value that investors get here goes down significantly. For me, investing in BKR is a bet that you will get some appreciation from the stock and the company’s ability to efficiently grow bottom line, but also strong buybacks and earnings, despite the volatile market environment. I’m hoping to see BKR invest heavily in overseas markets and offshore locations to take advantage of the trend they’ve observed in the last quarter.
Appraisal and conclusion
I think BKR is a very exciting opportunity in the oil and gas market. But paying 18 times forward earnings even if the company is expected to have strong growth is not feasible given the industry in which it operates. It might stand out a little bit given the product it’s offering, but I think there’s a huge risk here that a strong correction could happen if there’s a slowdown in growth or an error in the earnings report.
stock chart (look for alpha)
This is a risk I’m not comfortable taking and would rather wait on the sidelines until the valuation goes down, or the company is really able to justify the valuation. Given the quality of business and the strong balance sheet, I’m still going to hold it.
