Logically, the name of a company does not matter to investors at all. It should be all about profit and prospects, but I have never felt the same about Google (GOOG: GOOGL) since they became Alphabet and I have an illogical, but I believe understandable, aversion to names that are changed to hide the identity or industry of the company, like Accenture (ACN) or Altria (MO). Even worse though, is when a company name is unwieldy, and the best recent example of that has to be “Baker Hughes, A GE Company” (BHGE). Any name that attempts to tell a story or includes punctuation is an abomination, and BHGE fails on both fronts. Still, after a drop on disappointing earnings this morning, I am prepared to swallow my pride and buy the stock.
As I have often pointed out, one of the most fundamental things to keep in mind when looking at corporate earnings is that while last quarter’s results are, by definition, history, the stock market is generally a forward discounting mechanism. Prospects usually matter more than past performance and, on that basis, BHGE looks like a bargain.
The usual measure of price relative to expectations is the PE/ Growth, or PEG, ratio. When that ration is below 1.0 it is generally considered an indicator of value, and BHGE’s PEG right now is 0.36. The numbers are therefore encouraging, but like my reasons for disliking the stock in general, my reasons for liking it right now are a little less mathematical.
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That incredibly ugly name was the result of the massive oilfield service company Baker Hughes being bought by GE a couple of years ago, who almost immediately span the company back off. If you think that shows some inconsistency and indecisiveness you are absolutely right. The cause for optimism comes at least in part because the chaotic and somewhat toxic GE influence is about to disappear. GE has announced that they are selling their interest, leaving Baker Hughes back where it started, as an independent company.
Given that GE has had somewhat of a reverse Midas touch in recent years that has to be a good thing, but BHGE still needs an improvement in industry conditions to succeed. Fortunately, the disconnect between past performance and future prospects that I mentioned above works here in the stock’s favor.
The prospects for oilfield service companies are largely dependent on the decisions of big energy producers, and those decisions are made based on very long time-frames, rendering one quarter’s results from a company like BHGE as good as irrelevant. What matters is how producers feel about energy pricing and demand in the future. At this point, that outlook should be pretty positive.
Last year’s agreement between OPEC and others to cut crude oil output has pushed prices higher, but more importantly from a long-term perspective it has also resulted in the virtual elimination of the global glut of crude that weighed so heavily recently. That doesn’t mean that oil prices are bound to increase, but it does make another collapse a lot less likely, and that in turn increase the odds of long-term growth plans from producers and therefore increased business for BHGE.
You never know, once GE has exited its ownership position, maybe Baker Hughes can drop the sub-clause in their name and return to a less offensive nomenclature. Even if they don’t though, the long-term dynamics and the reasonable assumption that without the seemingly jinxed GE they will be able to take advantage of them make the stock appealing at such an excellent and obvious value.