TSC Ratings' Updates: City National

Baker Hughes(BHI Quote) has been downgraded from buy to hold. Baker Hughes incorporated supplies products and technology services, and systems to the oil and natural gas industries worldwide. It operates in two segments: drilling and evaluation, and completion and production.

The company displayed a steady financial performance in the recently concluded quarter, on the back of a rise in the demand for BHI's products and services. Furthermore, BHI's share-repurchase program and good fundamentals are enhancing shareholders' value.

The company has displayed a steady financial performance on the back of rise in demand for its products and services, following an increase in capital expenditure by oil and gas companies. The company's revenue increased 8.0% to $2.67 billion in the first quarter of fiscal year 2008, compared with the first quarter of fiscal year 2007. Net income increased at a lower rate of 5.4% to $395.00 million, restricted by margin contraction and higher interest expenses.

The company's performance in the last three years has been impressive, with revenue increasing at a compounded annual growth rate (CAGR) of 18.7%, and net income recording CAGR of 35.7%.

BHI recorded a return-on-equity (ROE) of 24.89% as of the end of first quarter fiscal year 2008, due to net income growth and share repurchases in the last one year. Though ROE was slightly lower than the industry average, it was significantly higher than the S&P 500 average. During the first quarter fiscal year 2008, BHI repurchased 8.20 million shares for a total of $567.80 million. At the end of first quarter of fiscal year 2008, the company had authorization to repurchase about $256.20 million worth of shares. We expect this to support its ROE going forward.