Buying Baker Hughes Before $75 and Beyond

NEW YORK (TheStreet) -- Although Halliburton (HAL) and Schlumberger (SLB) continue to capture the lion's share of coverage within the oilfield services sector, Baker Hughes (BHI) demonstrates why savvy investors see a three-team race.

Last week, Baker Hughes posted a 23% jump in quarterly profit, helped by improved margins at its North American operations. The company posted first-quarter net income of $328 million, or 74 cents per share on revenue of $5.73 billion. Net income grew more than 22% year over year, while revenue surged 10%.

So despite concerns about weak oil prices and soft rig counts, the company enjoyed an average of 6% year-over-year growth in revenue in the last four quarters. And this is while the company has been profitable for eight consecutive quarters.

Investors had other concerns about Baker Hughes' capital deficits, or the fact that the company is not as deep-pocketed as its rivals. But with adjusted net income arriving at 84 cents, exceeding estimates, none of this mattered during the call.

With the entire sector's numbers, including market leaders Schlumberger and Halliburton, posting better-than-expected first-quarter earnings results, there's no denying that this industry is on the rebound. Given that Baker Hughes' is benefiting from improved business conditions in North America (where revenue rose to $2.78 billion), investors have even more reason to be optimistic.

Likewise, North American margins improved by 200 basis points on an adjusted basis. This is despite a drop in well count, which management said was caused by severe winter weather in the Rockies and northeast United States. Baker Hughes' Latin America revenue fell 10% to $530 million.

But this decline was offset by a strong performance in the Middle East and Asia Pacific, which posted revenue of $1.11 billion, up 24%. By contrast, Schlumberger reported a quarterly profit that beat estimates for the tenth straight quarter. But its revenue fell short of expectations, hurt by lower drilling and pricing pressure in Latin America.

This is an encouraging sign for Baker Hughes; even though larger rivals are doing what they have to do to capture market share, investors should remain pleased with what Baker Hughes has been able to accomplish. Management's plan for long-term growth is working.

What's more, investors should be excited about Baker Hughes' pressure pumping business, which has shown recent margin expansion. One of the ways the company has achieved this is by transitioning some of its fracking trucks into bi-fuel, which functions on both natural gas and diesel.

Ongoing improvements are expected to help Baker Hughes lower costs. This means that management can still extract more value from this business on top of the value Baker Hughes has already delivered.

Consider, Baker Hughes' shares, which touched a three-year high Monday of $70.69, have climbed roughly 25% in the past three months. This has outperformed both Halliburton and Schlumberger. During that span, the latter two companies have posted gains of 19% and 14%, respectively.

Investors are wise to not take Baker Hughes for granted. These shares are not done climbing. The majority of analysts (58%) rate the stock as a buy. On the basis on improved business conditions in North America and international expansion, fair market value for Baker Hughes should approach $75 by the second half of 2014.

At the time of publication, the author did not hold stock in any of the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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