Baker Hughes Needs Better Execution to Reach $54

NEW YORK (TheStreet) -- Back in May, I talked about the struggles that energy services giant Baker Hughes (BHI) continues to face in an industry that has been marred by slumping prices and weak rig counts.

As with Halliburton ( HAL) and Schlumberger ( SLB), Baker Hughes showed tremendous progress in the April quarter. In fact, Baker Hughes was the only one of the three companies to post any sequentially growth. But that was as far as the advantages went.

While I was willing to give management plenty of credit for the noticeable improvements, I also couldn't ignore that Baker Hughes also took a significant hit on year-over-year revenue growth and profits, which declined 2% and 30%, respectively. Credit Suisse, meanwhile, saw it another way. Despite the underperformance, Credit Suisse felt it was necessary to assign a $54 price target on shares of Baker Hughes, which (at the time) was a 25% premium from current levels -- a move that I thought was highly premature, if not a complete mistake.

In that article I asked, aside from the slight sequential revenue uptick (less than 1%), what was Credit Suisse seeing that I wasn't? I also suggested:

"The better approach for Baker Hughes (investors) 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. And I don't think that 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."

My cautious approached was not well received by some readers. But fast-forward three months later; the stock, after having dropped 8% during that span, is back to where it was (around $48 per share) from when we last discussed the company. And following Baker Hughes' second-quarter results, I don't believe that anything has drastically changed to suggest that we didn't have this company pegged pretty well all along.

I wasn't expecting a whole lot coming into the quarter. To that end, Baker Hughes' 3% revenue growth didn't disappoint. Granted, it's not a breathtaking performance when compared to Schlumberger's 7% growth. But it was encouraging that revenue accelerated 5% from the April quarter. The company is doing somewhat better in international markets, which was up 7%, beating expectations.

As with Schlumberger, Baker Hughes posted solid gains in areas including Mideast/Asia, Russia and Africa. But the company is still finding it tough to grow in Latin America, which declined by almost 8%. Management attributed the decline due to reduced activity and disbandment costs in Brazil and Mexico. This, however, was partially offset by decent growth in areas like Russia, West Africa, and the Mideast/Asia.

Elsewhere, revenue in North America advanced 3% from the April quarter, but was flat on a year-over-year basis. Though I could go on a rant and nitpick the lackluster results in North America, this performance, however, was pretty much on par with Schlumberger. But unlike Schlumberger, Baker Hughes didn't so well on the operating side of the business as gross margin fell roughly 3% year over year, leading to a 27% decline in operating income.

With the oil services sector being such a "bottom line" industry, I don't see how we can continue to ignore the bottom-line disappointments in these results. This quarter's 27% profit decline could have been excused if it didn't follow a 30% decline in the April quarter.

I've said this before and it certainly merits repeating here: While it's encouraging that international markets are growing are a quick pace, Baker Hughes needs better diversification.

I don't expect that North America will remain weak forever. But until it recovers, management is going to have a tough time producing growth. Unfortunately, absent new revenue, profitability will likely remain in a perpetual decline.

Back to my question: What was it that Credit Suisse saw to raise this price target to $54? I will agree that the worst is over for Baker Hughes. But absent better execution by management, this stock is not going anywhere for a while.

At the time of publication, the author held 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 co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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