Morningstar | Lowering Our Baker Hughes FVE Due to Potential Deleterious Effects From Accelerated GE Separation
We are lowering our Baker Hughes fair value estimate to $30 per share from $32 owing to potentially deleterious effects from the company's accelerated separation with parent company GE. Per an agreement signed in November 2018, GE has begun selling a portion of its stake in Baker Hughes. The agreements also lay out the framework for a full divestiture of GE's stake (to occur sometime after July 2019).As far as the direct impact of the separation, management is guiding for perhaps 20 to 40 basis points in operating margin as well as one-time charges of $200 million-$300 million. This amounts to about a $0.50 to $1 per share impact to our model. While we think this management view adequately captures near-term risks, we think there are additional risks of longer-term loss for Baker Hughes, which is why we've marked our fair value down a full $2 per share.
We had never put much stock in the ability of Baker Hughes' merger with GE Oil & Gas (completed in July 2017) to transform either companies' oil- and gas-services operations. However, we do think the separation of the Turbomachinery and Digital segments, which have existed as part of GE in some form for decades, poses a threat to the long-term value of these businesses. The segments (especially Turbomachinery) will continue to rely on GE for essential technology via joint ventures and other commercial agreements. GE is more than capable of running a successful JV that is adequately equitable to both parties (the CFM JV with Safran is a prime example of this). However, we think the risks are weighed to the downside for now. As such, we've lowered our long-term profitability forecasts slightly for the Turbomachinery and Digital segments.
After the revision, Baker Hughes still looks about 20% undervalued. In our view, this chiefly reflects overly pessimistic market-implied views on global oil and gas expenditure growth. For now, however, we think there are better ways to play this theme, notably Baker Hughes' peer Schlumberger.
Baker Hughes is an energy technology company. The company's segments are: Oilfield Services, which provides products and services for onshore and offshore operations ranging from drilling, evaluation, completion, production, and intervention; Oilfield Equipment, which provides products and services for the subsea, offshore surface and onshore operating environments; Turbomachinery and Processing Solutions, which provides equipment and related services for mechanical-drive, compression and power-generation applications; and Digital Solutions, which includes condition monitoring, industrial controls, non-destructive technologies, measurement, sensing, and pipeline solutions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.