We are maintaining our Buy recommendation on Baker Hughes, Inc. (BHI) shares following the company's quarterly results, which came in below our estimate which was above consensus. Baker Hughes shares trade at a discount to its peers despite the company's strong oilfield service franchise and growing international footprint. The company enjoys strong leverage to the current oilfield cycle, being the leader in a number of product and service categories. More than 70% of Baker Hughes revenue comes from products and services where it has the highest or second highest market share.
Management has made steady progress over the last few years in repositioning the company by divesting non-core assets and instituting greater capital discipline. The variance from our estimate was largely due to higher costs. While we have lowered our 2008 ($5.28 vs. $5.45) and 2009 ($6.15 vs. $6.30) earnings estimate, our long-term outlook continues to remain positive.
We expect strong, powered by an improved North American outlook and continued international expansion. Being a premium oilfield service player, the company remains well positioned to capitalize on the current oilfield cycle.
On relative valuation grounds, Baker Hughes shares are attractive at current levels, compared to its large-cap peers. We believe that the new Baker Hughes deserves a relatively modest valuation discount to Schlumberger (SLB), if at all, compared to the current level. This is the primary reason for our continued positive outlook for the stock. Our unchanged $90 price objective is based on 2008 P/E and EV/EBITDA multiples of 17.1x and 11.3x, respectively. Our target multiples are well within historical trading ranges for the stock.
Read the full analyst report on BHI.
Read the full analyst report on SLB.
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