Has Baker Hughes Finally Turned the Corner?

NEW YORK (TheStreet) -- Shares of oil services company Baker Hughes (BHI) have seen a slight uptick ever since the company's first-quarter earnings announcement.

While there are still concerns about the overall health of the oil industry -- which has been marred by slumping prices and weak rig counts -- analysts at Credit Suisse think Baker Hughes has turned the corner following years of reorganization. But is the stock worth $54 per share, which suggests a 25% premium from current levels? Credit Suisse believes it does.

From the numbers that I've seen from rivals Halliburton ( HAL) and Schlumberger ( SLB) the results have been mostly positive. Given what their management teams have stated, investors should expect a rebound for the sector.

However, the cynic in me won't forget that the same level of optimism was also proclaimed for 2012. Instead, things got worse. To date, the industry has suffered five consecutive quarters of falling rig counts. I suppose Credit Suisse feels that this quarter reflected a bottom in the decline. In many respects, there was some evidence to support this theory. But I still want to be cautiously optimistic here.

The better approach on Baker Hughes would be to wait and see. That's not a slight. While Baker Hughes looks meaningfully improved, the company still lacks the punching power of Schlumberger and Halliburton. I don't think the first-quarter report, which included a 2% decline in revenue, did enough to merit higher optimism -- not when Schlumberger posted 8% year-over-year revenue growth.

For that matter, even though Halliburton didn't excite the Street, the company still posted a modest year-over-year increase. So what exactly is Credit Suisse seeing in BHI that I'm not? My guess is it is looking at the fact that of the three, Baker Hughes was the only one to post sequential growth, albeit by less than 1%, which supports the "bottom" theory.

In other words, Baker Hughes can't get any worse from here. Still, does it deserve 13% increase in the share price, especially when net income declined 30% year over year? This is where Baker Hughes can benefit from better diversification as North American weakness really took a toll on the company's performance. Granted, the company is working hard to build its international market position. But with North America being such an overhang, I'll feel much better to see those efforts accelerated.

While the 30% profit decline is a pretty significant drop -- especially since North America is Baker Hughes' largest market -- it was nonetheless encouraging there was a slight 2% uptick sequentially. Again, this may be one factor in the upgrade by Credit Suisse.

For the performance, BHI CEO Martin Craighead said:

"Our first-quarter results reflect improvement in our North America segment. The increased revenue and profit margins in North America are due to higher activity levels in Canada, along with improved utilization in our pressure pumping business despite a 3% decline in the U.S. onshore rig count since last quarter."

Craighead touched upon some very important points. While the overall health of the industry is not of the "quick fix" variety, investors have to be pleased that management is moving the company in the right direction. Baker Hughes is actually showing decent progress. But the company is still behind Schlumberger and Halliburton. It's not bad company in which to be. But management has to do a better job in fixing its deficits in North America before investors are going to truly embrace this as a turnaround.

Here's Making Sense

Despite the recent improvement, I would be hesitant to jump on Baker Hughes today. That's not to say there isn't plenty of long-term value in the shares. If the company can continue to improve internationally while waiting for North America to rebound, the stock should work to the extent of Credit Suisse's $54 target.

But absent clearer signs of progress and a real bottom, patience is the best play here.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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