Today’s note includes an update on earnings from Baker Hughes (BKR) and a preliminary trading report from Vodafone (VOD). There were no ratings changes.
Next week, the earnings deluge starts, with sixteen companies reporting earnings.
Earnings Updates
Baker Hughes (BKR) – One of the world’s largest energy service companies, Baker Hughes is currently beleaguered by the depression in global oil and gas drilling activity. Also, the shares are being weighed down by General Electric’s sale (over 3 years) of its huge 377 million share stake. The company’s investment-grade balance sheet and positive free cash flow should provide it with the ability to endure until the industry’s eventual (at least partial) recovery.
Overall, an encouraging quarter, although it wasn’t quite as good as overly optimistic investors had expected, which led to a flattish stock in an upmarket. The company reported a net profit (on an adjusted basis) – always a positive in a cyclical industry – but the $0.10/share in adjusted earnings fell short of the $0.16 consensus estimate. Baker is making some progress by generating modestly stronger revenues (+9% compared to a year ago), although the comparison is against a weak period. New orders rose a more modest 4%. Margins expanded as higher revenues flowed to the bottom line. The company was optimistic that business would strengthen in the rest of 2021 and into 2022.
Part of the Baker story is its strong free cash flow. Year-to-date the company has produced a healthy $883 million in free cash flow – on an annualized basis this implies an 8% free cash flow yield (free cash flow divided by market cap). For shareholders, this suggests an 8% annual increase in shareholder value regardless of the stock’s performance. Directly benefitting shareholders, the company has reduced its net debt by $640 million, or about 18%, year-to-date.
The oilfield segments remain hobbled by sluggish drilling activity, as revenues fell 4% from a year ago. Strong natural gas/LNG business is helping offset weak oil activity. Revenues in the Turbomachinery/Process Solutions segment grew 40% while the Digital Solutions revenues rose 11%. These two growth businesses now comprise 40% of Baker’s total revenues and more than half its segment-level profits (which excludes corporate overhead), providing an interesting source of value in an otherwise cyclical company. The company continues to sign new agreements for hydrogen, carbon-capture and other alternative energy projects.
Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider. The relatively new CEO Nick Read (October 2018) is focused on increasing the company’s return on capital by strengthening its telecom “connectivity” platform, improving its operating efficiency and spending its capital more efficiently. In 2019, Vodafone acquired Liberty Global’s German and Eastern European assets, and has completed the partial spin off, through an IPO, of its European cell tower business (named Vantage Towers). Vodafone has a few obscure assets: it is the leading provider of mobile data and payments services in Africa and has a vast network of high-capacity data pipelines that may increase in value as 5G rolls out.
The second-quarter trading update showed encouraging results, with organic service revenue growth of 3.3%. Strength came from nearly all geographies, as both consumer and business activity returned to more normal conditions. While difficult to separate the “recovery” effects from the “growth” effects, Vodafone’s results at a minimum indicate steady underlying demand for its services.
Vodafone’s M-Pesa payments services volumes rose 45% from a year ago, from both recovery and growth effects. As Africa’s largest mobile payments service (serving 45 million people), with rapid growth, M-Pesa appears to be an undervalued asset.
The company said it was on track to deliver its full-year fiscal 2022 Adjusted EBITDA and free cash flow guidance.
Ratings Changes
None.
Friday, July 23, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.
Today’s podcast is about 7½ minutes and covers:
- Brief updates on:
- Baker Hughes (BKR) – missed overly optimistic estimates but reported strong free cash flow.
- Vodafone (VOD) – reported encouraging second quarter revenues and is on track to meet its full-year EBITDA and free cash flow guidance.
- Royal Dutch Shell (RDS/B) – is appealing the Dutch court’s ruling on its emissions reductions.
- General Motors (GM) – recalling 69,000 Chevy Bolts due to battery fire risk, and is trimming its truck production due to the chip shortage.
- MolsonCoors (TAP) – competitor Boston Beer overestimated the duration of the hard seltzer fad, which may be a positive for MolsonCoors.
- Lamb Weston (LW) – capacity expansion suggests a more favorable growth outlook.
- Final note:
- August edition of the Cabot Turnaround Letter will include a look at post-SPAC companies that have real value but have been tossed aside by investors.
Please join us for the 9th Annual Cabot Investor Conference, held online again this year, on August 17-19, that’s Tuesday – Thursday. You can see presentations by all of our analysts, which will include updates on their areas of expertise and discussions of their best picks.
Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.
Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.