Baker Hughes Is How to Play North America's Energy Recovery Cheap

Correction: Corrects in fourth paragraph to note data on industry price/earnings ratio came from Reuters.

NEW YORK (TheStreet) – Back in April, I told you that Baker Hughes (BHI) was heading to $75 per share. It was clear then that despite the dominance of larger rivals Halliburton (HAL) and Schlumberger (SLB) , Baker Hughes was not content with third place. At the time, shares traded at around $69.

Less than three months later, on June 23, the stock raced to $75, reaching as high as $75.64 on July 2, gaining almost 10% since my recommendation.

Shares closed Tuesday at $69.26, up 0.64%. Despite the recent 8% pullback, Baker Hughes investors are still 25% wealthier in 2014. But it's not time to sell. If management has its way, these shares will soon regain their $75 level and then some.

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With the stock trading at around 26 times trailing earnings, these shares are cheap considering the industry average P/E is 64, according to Reuters. This makes the stock a strong buy since the company is expected to grow earnings by 150% in the next two years, prompting Argus Research to raise its price target on the stock to $80.

Like both Schlumberger and Halliburton, Baker Hughes, is well positioned and remains a strong way to play both the North American energy recovery and the uptick in global demand. Management plans on driving shareholder value by focusing on its innovative strengths while accelerating the pace of commercialization.

For an industry not known for its technologies, Baker Hughes is pulling out all of the stops. The company plans to supplant conventional rod-lift systems with its new artificial lift technology LEAP, or Linear Electromagnetic Actuated Pump. For low-flow wells, rod lifts are the preferred choice. But Baker Hughes sees that as an inefficient solution, particularly when used for U.S. shale.

Industry experts believe LEAP can revolutionize the oil services industry and become a game-changer in the U.S. artificial lift market. It's not just about new products, however. Baker Hughes has developed a strong track record of execution.

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Consider that despite recent geopolitical concerns including violence in Iraq and uncertainty in Ukraine -- not to mention weak oil prices and soft rig counts -- Baker Hughes has seen an average of 6% year-over-year growth in revenue in the last four quarters. This is while the company has been profitable for eight consecutive quarters.

As for the future, the company plans to address what it perceives as critical areas facing customers today including well conversion efficiency and recovery. If management can address these issues while providing customers with efficient and cost-effective completions, Baker Hughes can steal market share from Schlumberger and Halliburton.

Baker Hughes’ pressure pumping business continues to show margin expansion, which is also an encouraging sign that management's recent focus on efficiency is working. These improvements, aimed at lowering operating expenses, will continue to boost the bottom line. This will allow management to use that excess cash for things like buybacks and dividends, which fits right into the company's plan to return value to shareholders.

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To the extent the company can achieve its production enhancement targets while capitalizing on the global energy recovery, these shares should do well. With the stock down 8% from its 52-week high, investors looking for a bargain in energy should consider Baker Hughes.

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TheStreet Ratings team rates BAKER HUGHES INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate BAKER HUGHES INC (BHI) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Energy Equipment & Services industry. The net income increased by 47.1% when compared to the same quarter one year prior, rising from $240.00 million to $353.00 million.
  • BHI's revenue growth trails the industry average of 20.7%. Since the same quarter one year prior, revenues slightly increased by 8.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • BHI's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.42, which illustrates the ability to avoid short-term cash problems.
  • Powered by its strong earnings growth of 48.14% and other important driving factors, this stock has surged by 41.50% over the past year, outperforming the rise in the S&P 500 Index during the same period. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • BAKER HUGHES INC has improved earnings per share by 48.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BAKER HUGHES INC reported lower earnings of $2.47 versus $2.98 in the prior year. This year, the market expects an improvement in earnings ($4.17 versus $2.47).

At the time of publication, the author held no positions in any of the stocks mentioned.

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

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