Stock Analysis & Ideas

Baker Hughes Plunges on Sour Earnings Report, but There’s Hope

Story Highlights

Baker Hughes is down roughly 9% so far after releasing its earnings report, and investor sentiment metrics are in open revolt. I’m still bullish, thanks to a slate of demand factors and the company’s ability to meet them.

Why isn’t oilfield services company Baker Hughes (BKR) doing better than it is? Oil prices are still cripplingly high, and demand is still brisk. What happened with its earnings report to send the company down about 9% in today’s trading session so far, and why am I still bullish despite the clear trouble ahead?

Multiple misses in the company’s earnings report sent the company on a downward slide. Baker Hughes posted adjusted earnings of $0.11 per share, which was just half of the $0.22 consensus projection.

Worse, revenue was also down against projections. Baker Hughes turned in $5.05 billion in revenue, while the Zacks consensus looked for $5.37 billion.

Baker Hughes’ failure to meet projections comes with some standard supporting reasons, but I remain bullish regardless. It may not always match expectations, but this is a company with a toehold in a vital market. That should make it a good pick to survive an upcoming recession intact.

The last 12 months for Baker Hughes shares featured a steady climb, followed by explosive—and volatile—gains. The volatility streak left Baker Hughes off its highs but still up against the full year so far. Back in July 2021, the company was just under $20. Today, it’s almost $26.

Wall Street’s Take on Baker Hughes

Turning to Wall Street, Baker Hughes has a Strong Buy consensus rating. That’s based on nine Buys and one Hold assigned in the past three months. The average Baker Hughes price target of $37.48 implies 45.55% upside potential.

Analyst price targets range from a low of $32 per share to a high of $46 per share.

Investor Sentiment Rapidly Sliding Downward

Right now, there’s not much support behind Baker Hughes in general. One of the only high points for the company is its 7 out of 10 Smart Score on TipRanks. That’s the highest level of “neutral,” which suggests a fair chance that the company will ultimately outperform the broader market.

Yet, despite this and a strong showing among analysts, Baker Hughes has a serious tailwind in investor sentiment. Hedge fund involvement, based on the TipRanks 13-F Tracker, is just one downward metric.

Hedge funds sold 32.5 million shares in the last quarter. This was the third consecutive declining quarter for hedge fund involvement, and this time saw hedge fund positions cut nearly in half.

Meanwhile, insider trading at Baker Hughes isn’t much better. In the last four months, insiders sold $2.5 billion worth of shares. While the picture is a little brighter going back over the full year, it’s not that much brighter. Sell transactions have outpaced Buy transactions, but by the comparatively narrow ratio of 40 Sells to 35 Buys.

As for retail investors who hold portfolios on TipRanks, they’re in a fairly steady state of decline. The number of TipRanks portfolios with Baker Hughes shares was down 0.4% in the last seven days and down 1.3% in the last 30 days.

Finally, there’s Baker Hughes’ dividend history to consider. The company has maintained a dividend of $0.18 per share for the last three years. That the dividend remained in place throughout the pandemic is a good sign, but that the dividend hasn’t shifted at any point in the last three years is somewhat concerning.

BKR is Still a Part of a Resilient Industry

Granted, things are not looking bright at Baker Hughes right now. However, there’s one crucial thing to remember: Baker Hughes is an oilfield services company. Its fortunes are directly tied to oil drilling and extraction. Oil will be in demand right up until the point where a complete economic disaster hits.

Thanks to oil’s sheer diversity, it’s cemented its position as one of the most resilient industries around. The obvious use as fuel applies, but don’t leave out the ancillary uses like plastics. Every plastic item currently in your house or apartment depends on the oil industry.

However, Baker Hughes has its fair share of headwinds. The company cited several supply chain-related issues in its losses. These are familiar losses; they’ve been impacting every part of economic life, from the grocery store to furniture sales. With Baker Hughes unable to get some of its most vital components, that’s limiting its profitability.

It’s already done surprisingly well despite the supply-chain issues. The company reported a 37.3% rise in adjusted second-quarter profit from the previous year’s figures.

However, with concerns over demand destruction still in force—especially as the summer driving season starts its decline—that’s going to weigh heavily on companies like Baker Hughes – but only so heavily.

As long as there are jobs to drive to, oil demand is there. As long as there are power plants that burn oil or operations that require plastics, oil demand is there. About the only situation that would prompt complete demand destruction for oil is the end of the world.

That demand floor is much of what makes Baker Hughes an attractive investment. We’re likely going into a recessionary period. By some reports, we’re already there. If there is a recession, either now or coming up, an investment that can really only drop so far will be a welcome plank in investor portfolios.

Concluding Views – The Pros Outweigh the Cons

There are serious problems ahead for Baker Hughes. The combination of dwindling investor sentiment and supply-chain issues is going to hit the company hard in the months ahead.

A recession on top of everything else will likely do supply chains little good. While demand will decline, so too will headcounts. That will make an easier job tougher to do with fewer hands to help.

However, there are positive points to Baker Hughes as well. The company’s connection to the oil industry will be a big help. So too is its current position; the company is trading well under its lowest price targets.

This poses an attractive investment case. Throw in a rock-solid dividend—perhaps a bit too solid, as it doesn’t much account for inflation—and that brightens the picture.

That’s much of why I’m bullish on Baker Hughes. Investors may be getting out, but they may be getting out a bit too early. An attractively-priced stock closely connected to a vital product like oil sure seems like a win in progress.

Disclosure

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