Soaring Through New Energy Orders, Digital Transformation, And Long-term Contracts Fuel Optimistic Growth Projections

Key Takeaways

• Strong growth in new energy orders and strategic digital optimization initiatives promise diversified income streams and enhanced operational efficiencies.
  
• Solid order momentum in Gas Tech Services and diversified product offerings point to strengthened long-term, high-margin revenue streams and reduced market dependency.
  
• Heavy reliance on large gas project awards and global economic uncertainties, combined with growing competition in sustainable solutions, pose risks to revenue and net margins.

Catalysts

Provides a portfolio of technologies and services to energy and industrial value chain worldwide.

• The record new energy orders of $445 million during the quarter, approaching the $750 million booked in 2023, indicate a robust growth trajectory in the New Energy sector. This growth in new energy orders is expected to positively impact revenue and diversify income streams, reducing reliance on traditional energy markets.
  
• The solid order momentum in the Gas Tech Services business, including a 25-year service agreement valued at $500 million, suggests a strengthening of long-term, high-margin revenue streams. This could lead to improved net margins through recurring revenue from service contracts.
  
• A key operational focus on improving cost efficiencies across the business has been emphasized, most notably in the OFSE segment where margins came in above guidance. This ongoing optimization initiative is expected to contribute to higher net margins through reduced operational costs.
  
• The significant $3.5 billion non-LNG equipment quarterly bookings in IET highlight the demand for Baker Hughes' diversified product offerings outside the LNG space. Such diversified high-level bookings can drive sustainable revenue growth by broadening the market base and reducing dependency on any single market.
  
• The strategic emphasis on digital optimization, as evidenced by the multi-million dollar global frame agreement with BP for digital services, indicates potential revenue growth through digital transformation offerings. This digital focus is likely to enhance earnings by establishing new revenue streams and improving operational efficiencies.

Assumptions

• Analysts are assuming Baker Hughes's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $3.2) by about August 2027, up from $2.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, down from 17.1x today. This future PE is lower than the current PE for the US Energy Services industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 1.61% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.19%, as per the Simply Wall St company report.

Risks

• The significant reliance on large project awards in gas infrastructure globally could lead to fluctuations in revenue if geopolitical situations or economic sanctions impact project progress or initiate cancellations, affecting future revenue.
  
• A softened global demand and related economic uncertainties, including continued inflation and volatility in oil prices, could impact upstream spending and investment by clients, potentially reducing the demand for Baker Hughes' services and affecting revenue growth.
  
• The competition in new energy sectors and traditional oilfield services could intensify as companies pivot towards sustainable solutions, potentially impacting Baker Hughes' market share and net margins if they fail to remain competitive in offering innovative solutions.
  
• Operational execution risks, particularly in achieving the projected cost savings from restructuring and process optimization initiatives within OFSE and IET segments, could affect the company's ability to meet its EBITDA margin targets, impacting net margins.
  
• The outcome of the EPA's regulatory decisions on projects like the carbon sequestration plant in Indiana could set precedence impacting future projects. Delays or stringent regulations could slow down Baker Hughes' ability to book and realize revenue from these new energy projects, affecting earnings.

Valuation

• The analysts have a consensus price target of $42.55 for Baker Hughes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $34.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $31.0 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $34.24, the analyst's price target of $42.55 is 19.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.