Earnings Scorecard: Baker Hughes (BHI)

Since the second quarter earnings announcement, Baker Hughes Inc. (BHI) shares have been experiencing a downtrend. We believe that the main reasons behind this negative trend are weakness in GoM activity levels, issues related with geographic reorganizations and the integration of BJ Services operations.

In the second quarter, Baker Hughes acquired 100% of the outstanding common stock of BJ Services Company in a cash and stock transaction. The company is dynamic in plugging holes in its product lineup through bolt-on acquisitions. Among the diversified oilfield service players, Baker Hughes is one of the best positioned, with significant improvement in activity levels recorded in North America.

Earnings Review

The company reported second quarter 2010 earnings of 41 cents per share, compared with the Zacks Consensus Estimate of 43 cents.

Revenues in the reported quarter, including revenues for BJ Services in May and June 2010, were $3.37 billion, compared with $2.37 billion in the year-earlier quarter and the Zacks Consensus Estimate of $3.34 billion.

We have discussed the quarterly results at length here: Baker Hughes Slips, Profits Up

Agreement of Analysts

Though the long-term outlook for the company remains favorable, near-term concerns are reflected in negative estimate revisions. Out of 28 analysts covering the stock, eighteen have lowered their 2010 estimates in the past month and only 1 analyst raised the estimate. In the last 7 days, two analysts have lowered their estimates and none has raised.

For 2011, thirteen of 29 analysts covering the stock moved downward in the last 30 days, while 5 raised their expectations. However, in the last 7 days, one analyst lowered the estimate and no upward movement was noticed.

Magnitude of Estimate Revisions

Given the negative tone of revisions, the Zacks Consensus Estimate for fiscal 2010 has decreased 11 cents over the last month. Earnings estimates for fiscal 2011 decreased 12 cents over the same period. Over the past seven days, the Zacks Consensus Estimate decreased 2 cents and 1 cent for 2010 and 2011, respectively. The current Zacks Consensus Estimate is pegged at $1.88 and $3.00 for 2010 and 2011, respectively.

Neutral Rating Maintained

We are maintaining our Neutral recommendation for Baker Hughes following the second-quarter results. The company recently reorganized its businesses according to geographical markets. While we believe this restructuring will be favorable in the long run, near-term challenges remain as it integrates BJ Services and competes in a recovering market.

Management has given a cautionary outlook for the remainder of the year and expects earnings could be hurt by weakness from the drilling moratorium in the Gulf of Mexico, as well as slowdowns in Africa and Mexico activity. Baker Hughes’ margins and revenue growth are lagging behind peers. According to regions, the company is experiencing a mixed performance. While Norway, Russia and Iraq are the key areas of growth, Mexico and Africa are facing challenges. We have a Zacks #3 Rank (short-term ‘Hold’ recommendation) on Baker Hughes shares.

BAKER-HUGHES (BHI): Free Stock Analysis Report

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