This week’s Friday Update includes our comments on earnings from Baker Hughes (BKR), where we raised our price target from $26 to $31.
Shares of Wells Fargo (WFC) and Marathon Oil (MRO) both slipped back below our price targets, so we will keep these targets unchanged for now. We continue to like what is going on at both companies.
Next week, we anticipate earnings reports from General Electric (GE), Xerox Holdings (XRX), Western Digital (WDC) and Altria (MO).
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.
Baker reported a strong quarter. While revenues were flat (in line with estimates), orders rose 28% and earnings of $0.25/share were sharply better than the $(0.07) loss a year ago. Earnings missed the $0.29 estimate but the overall strength in its business was more important. Management spoke optimistically about their revenue and margin prospects for 2022 and beyond. We agree, and are raising our price target from $26 to $31.
In the quarter, revenues were flat but orders rose 28% – this is an important indicator of future revenues and suggests that business is improving. The book-to-bill ratio, which compares orders to revenues, was 1.21, also pointing to better conditions ahead.
The recovery in Oilfield Services segment (Baker’s largest segment) is moving forward as orders rose 13% and revenues rose 12%. Oilfield Equipment orders and revenues fell, partly due to the heavy mix of subsea equipment which remains in a cyclical depression. Revenues in the Turbomachinery & Process Solutions segment, the second-largest, slipped 9% but orders rose a sharp 62% from a year ago. The TPS segment is becoming a bit of a gem for Baker Hughes.
Adjusted EBITDA rose 10% from a year ago, with the margin expanding to 15.3% from 14.0%. Expense control along with higher pricing and improved mix helped bring more of the higher revenues to the bottom line, particularly in Oilfield Services where the incremental margin was nearly 34%.
Free cash flow for the quarter was healthy at $645 million and sharply higher than the $250 million a year ago. Surprisingly, Baker delivered its highest-ever annual free cash flow last year, at $1.8 billion. And, it returned $1.2 billion of this to shareholders through buybacks and dividends, and repaid over $900 million in debt. The balance sheet remains strong, with $3.9 billion in cash against $6.6 billion in debt.
Strategically, the company continues to make encouraging inroads into LNG, hydrogen, carbon capture and other unconventional markets. Management spoke more about their continued alignment into two main segments: Oilfield Services & Equipment and Industrial Energy Technology. They also commented about “organizational and corporate structure.” This, for now, means redirecting capital toward growth opportunities, mostly into the “IET” segment. Ultimately, this alignment may conclude with a spin-off or divestiture – either outcome would be a significant booster for the shares. And, General Electric continues to sell their shares and may be completed with their divestiture by midyear, removing an overhang.
Friday, January 21, 2022 Subscribers-Only Podcast:
Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.
Today’s podcast is about 10½ minutes and covers:
- Brief update on:
- Baker Hughes (BKR) – encouraging earnings report.
- Comments on other recommended companies:
- Credit Suisse (CS) – Bad news as chairman resigns.
- Wells Fargo & Company (WFC) – Regulators terminate a consent decree.
- Elsewhere in the markets:
- Cryptocurrencies, Turkey, and U.S. Federal Reserve stable coins.
- Final note:
- Comment on the current burndown in momentum stocks.
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | Price on 1/20/2022 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 5.21 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 13.78 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 24.66 | 0.0% | Buy (44) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 21.63 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 5.12 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 43.99 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 65.33 | 1.5% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 22.42 | 4.5% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 10.92 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 14.64 | 3.0% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 21.73 | 2.8% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 31.82 | 3.5% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 18.68 | 1.3% | Buy (18) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 40.75 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 41.70 | 1.9% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 18.26 | 5.1% | Buy (57) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 59.82 | 0.0% | Buy (93) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 98.25 | 0.3% | Buy (160) |
| Large cap | Royal Dutch Shell plc | RDS.B | Jan 2015 | 69.95 | 49.55 | 3.9% | Buy (53) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.63 | 0.0% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 23.83 | 2.5% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 9.86 | 2.6% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 21.07 | 3.0% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 11.02 | 4.0% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 23.07 | 4.0% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.22 | 6.3% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 37.06 | 4.3% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 49.37 | 2.8% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 311.01 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 55.00 | 1.5% | Buy (55) |
| Large cap | Baker Hughes Company | BKR | Sep 2020 | 14.53 | 26.72 | 2.7% | Buy (26) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 59.92 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 50.33 | 7.2% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 26.83 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 53.18 | 3.6% | Buy (70) |
Market cap is as-of the Initial Recommendation date.
Current status indicates the rating and Price Target in ( ).
Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.
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.