Next Stop $65 for Baker Hughes

NEW YORK (TheStreet) -- With Schlumberger (SLB) and Halliburton (HAL) posting better-than-expected third-quarter earnings results, it certainly seems as if business conditions in North America has taken a turn for the better. That certainly bodes well for Baker Hughes (BHI), which enjoys roughly 50% of its revenue from that region.

While Baker Hughes has consistently been overlooked when discussing the "Big Three" within the energy services space, Baker Hughes stock has actually outperformed Schlumberger by 8%. It seems management is finally ready to take that extra step forward to produce the sort of results the Street has been waiting for. With growth having returned to North America and abroad, these shares still look undervalued by at least 10%.

I don't believe the Street has ever doubted that the energy sector -- which has been marred by weak oil prices and soft rig counts -- would rebound in a meaningful way. The question has been if/when the market did recover, would Baker Hughes regain its trading status as a strong oil producer as opposed to natural gas, where there has been some continued weakness? These and other questions were answered convincingly following the company's third-quarter earnings results, which included a 22% jump in profits.

Baker Hughes posted revenue of $5.8 billion, which advanced 5.5% year over year. While it's not on the level of Schlumberger's 9% growth, Baker Hughes outperformed Halliburton by almost 4%. Given that this sector has always been considered a "bottom line" business, Baker Hughes 22% profit increase was the best among the "Big Three." And I believe the company's management deserves a lot of credit.

Let's not forget, an increased amount of strain was added on the pressure-pumping business at the height of the natural-gas surplus. The company's management had come under quite a bit of scrutiny as a result of lower prices. Like Schlumberger and Halliburton, which were forced to shift operations to higher-cost areas like shale, Baker Hughes having outperformed both companies in profitability implies a higher level of execution, especially since shale is less efficient.

Equally impressive were the stellar results in North America, which not only grew 6.6% from the July quarter, but posted 10% improvement in margins, which was up 245 basis points. Again, given the tough conditions that have rattled the entire sector over the past couple of years, Baker Hughes' margin performance suggests an incredible level of fiscal awareness by management.

I don't want to exaggerate what this means. Nor am I suggesting that Baker Hughes is suddenly better than Halliburton and Schlumberger. But as we continue to asses these performances on a quarter-by-quarter basis, there's no question that Baker Hughes won this round, especially given the fact that both Halliburton and Schlumberger are known for their capital advantages. Said differently, Baker Hughes is not as deep-pocketed as its rivals.

While Halliburton and Schlumberger has used their capital to expand in international territories, I was also impressed by the manner in which Baker Hughes management was able to maintain the growth momentum it achieved in international operations. Posting 14% year-over-year growth outside North America is no small accomplishment, especially when you're playing from behind.

To that end, while Schlumberger still maintains a strong lead with two-thirds of its revenue coming in from international markets, Baker Hughes investors have to be encouraged by how well-diversified its operations have become. Even though there are clear signs that North America has bottomed, Baker Hughes is now in a position to offset any potential weakness with better performances abroad.

For now, I believe the Baker Hughes story has changed. While management still has plenty of work to do to shore up the company's market position against Halliburton and Schlumberger, I don't believe this stock is the risky bet that it was once perceived to be. Until something fundamentally changes for the worst, (which I don't expect will happen) fair market value points to $65 per share on the basis of the strong North American rebound and international expansion.

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.

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