Baker Hughes (BKR) 23Q2 Update

BKR reported 23Q2 GAAP diluted EPS of $0.40 vs. a loss of $0.84 a year ago and my estimate of $0.27.  Non-GAAP EPS was $0.39 compared with $0.11 last year and my estimate of $0.33.  Revenues of $6.3 billion rose 25.1% vs. 22Q2, 1% better than my projections. Orders of $7.5 billion were down 2% sequentially but up 28% YOY.  The excess in GAAP earnings vs. my projections was due entirely to gains on equity investments, as the company wrote up the value of some of its New Energy investments.  BKR delivered $623 million of free cash flow in the quarter, compared with 22Q2’s $147 million.

Management remains optimistic in its 2023 outlook, despite a potential economic downturn.  Strength in the international and offshore markets should more than offset a weaker North American market.  Recent increases in oil prices should also support exploration and production activity.  BKR’s long cycle LNG equipment business is having a banner year and strong demand for LNG may extend the upcycle.

Based upon 23Q2 results, BKR has raised the low end of its guidance ranges.  It now anticipates revenue of $24.8-$26 billion, adjusted EBITDA of $3.65-$3.8 billion and a lower adjusted effective tax rate of 32.5%-37.5%.  With 23Q2 results and that revised guidance, I now project 2023 GAAP EPS of $1.74, up from $1.56 previously, and non-GAAP EPS of $1.56, up from $1.45.  For 2024, my forecast calls for revenues up 10.8%, GAAP EPS of $1.76 (up from $1.63) and non-GAAP EPS of $1.99 (up from $1.85).

Since my last report, BKR’s stock has risen 26%, outperforming the S&P 500 and peers.  At the current price of $35.59, it is valued at 20.5 times projected 2024 GAAP EPS and 17.9 times projected 2024 non-GAAP EPS, which is now well above the averages for BKR’s peers (HAL, NOV and SLB).  Accordingly, my price target of $34 is unchanged and equates to a one-year forward multiple of 17.0 times projected 2024 non-GAAP EPS of $1.99.  I had lowered my performance rating to “3” (Neutral) in early July when the stock rose to nearly $32.  Geopolitical events could conceivably take the price of oil (and demand for BKR’s product and services) higher from here, but they are not “forecastable.”  Without any other apparent catalyst that would raise BKR’s earnings trajectory to support (or enhance) its premium valuation, I am maintaining my neutral performance rating on BKR’s stock.

This is a summary of my report on Baker Hughes Company (BKR), which was originally published on August 8. To obtain a copy of the report, please reach out to me using the contact information provided below.

August 17, 2023

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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