Houston, Texas-based Baker Hughes Company (BKR) provides a portfolio of technologies and services worldwide, operating through four segments: Oilfield Services (OFS); Oilfield Equipment (OFE); Turbomachinery & Process Solutions (TPS); and Digital Solutions (DS). The company has benefited significantly from the industry tailwinds and the global recovery. Its shares have gained 33.5% in price over the past year and 31.7% over the past six months to close yesterday’s trading session at $27.30.

Oil prices skyrocketed last year with rebounding oil demand worldwide and OPEC’s supply cuts. Higher crude prices spurred more drilling activity, fueling demand for BKR’s equipment and services. Oil prices were up more than 50% last year, while the U.S. rig count rose 68% year-over-year to 586 at the end of the fourth quarter of 2021.

BKR reported approximately $7.70 billion of orders for its Turbomachinery and Process Solutions unit in 2021.The robust demand was primarily related to liquefied natural gas (LNG). “We believe that the step-up in LNG order activity provides a solid indication that a new LNG cycle is beginning to take shape,” said Baker’s Chief Executive Officer Lorenzo Simonelli. However, the company cited pandemic-related disruptions as having impacted its operations and anticipates the supply chain and inflationary challenges that increased costs pressures and caused delivery issues in its oilfield services and digital solutions business units to continue in the first half of 2022.

Here is what could shape BKR’s performance in the near term:

Earnings Missed Street Estimate

For the fourth quarter, ended December 31, 2021, BKR’s revenues increased marginally from the prior-year quarter to $5.52 billion, topping the consensus estimate by 0.4%. Its adjusted operating income grew 23% year-over-year to $571 million, while its adjusted net income came in at $224 million, compared to its $50 million year-ago loss. The company’s EPS declined 64% year-over-year to $0.32. But its adjusted EPS increased substantially from its negative year-ago value to $0.25. However, it missed the Street’s EPS estimate by 10.7%. Furthermore, BKR’s trailing-12-month net income and EPS came in at negative $219 million and $0.27, respectively.

Mixed Valuation

In terms of forward P/E, BKR is currently trading at 21.88x, which is 44.6% higher than the 15.13x industry average. Also, its 10.70 forward Price/Cash Flow ratio is 72.7% higher than the 6.20 industry average.

However, BKR’s EV/Sales is 48.7% lower than the 2.48x industry average, and its 25.9% forward Price/Sales is lower than the 1.52x industry average.

Lean Profit Margins

BKR’s 19.72% and 13.07% respective gross profit and EBITDA margins are 51.8% and 38.4% lower than the 40.86% and 21.21% respective industry averages. Also, its levered FCF margin is 52.6% lower than the 9.94% industry average.

Moreover, BKR’s negative 1.48% and negative 0.62% respective ROE and ROA compare with the 2.79% and 1.04% industry averages.

POWR Ratings Reflect Uncertainty

BKR has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Value, which is consistent with its mixed valuation.

BKR has a B grade for Momentum. This is justified because the stock is trading above its 50-day and 200-day moving averages.

Among the 78 stocks in the Energy – Oil & Gas industry, BKR is ranked #29.

Beyond what I have stated above, one can also view BKR’s grades for Quality, Growth, Sentiment, and Stability here.

View the top-rated stocks in the Energy – Oil & Gas industry here.

Bottom Line

BKR gained significantly over the past year due to bullish industry trends. And the company reported a 28% year-over-year increase in orders in its most recent quarter. But its revenues have remained flat. Furthermore, the company expects operational disruptions to continue in the coming months, which could further hamper its growth. In addition, EIA projects crude oil prices will fall from 2021 levels to average $75/b in 2022 and $68/b in 2023, citing increasing inventories. Thus, considering the anticipated near-term headwinds, we think it could be wise to wait for a better entry point in the stock.

How Does Baker Hughes Company (BKR) Stack Up Against its Peers?

While BKR has an overall POWR Rating of C, one might want to consider taking a look at its industry peers, SilverBow Resources, Inc. (SBOW) and VAALCO Energy, Inc. (EGY), which have an A (Strong Buy) rating.

Note that SBOW is one of the few stocks handpicked by our Chief Value Strategist, Steve Reitmeister, currently in the POWR Value portfolio. Learn more here.

BKR shares fell $0.30 (-1.10%) in premarket trading Friday. Year-to-date, BKR has gained 13.47%, versus a -9.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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