Baker Hughes Posts Robust Q4 2025 with Record IET Backlog, Yet Valuation Still Looms Large

What happened

Baker Hughes announced its fourth-quarter and full-year 2025 results, highlighting strong order intake and backlog growth. The company reported $7.9 billion in orders, including $4.0 billion from its Industrial Energy Technology (IET) segment, and a record remaining performance obligation (RPO) of $35.9 billion, with IET RPO reaching $32.4 billion. This aligns with the DeepValue report's focus on IET as a critical growth driver, potentially supporting higher normalized earnings if execution remains solid. However, the report underscores persistent earnings quality issues, such as recurring restructuring charges and equity-investment gains, which may inflate sustainable profitability in a cyclical business. Despite this operational strength, the stock trades approximately 64% above a conservative DCF estimate, leaving limited margin of safety amid ongoing valuation concerns.

Implication

The record IET orders and RPO signal sustained demand in LNG and industrial markets, which could bolster future revenue and earnings if backlog conversion remains strong. This may partially mitigate cyclical worries, but the OFSE segment's contraction and commodity price volatility still present significant headwinds. Earnings quality remains clouded by non-core items, obscuring the true underlying profitability and complicating investment decisions. With the stock overvalued relative to intrinsic value, any shortfall in margin expansion or order execution could trigger substantial downside pressure. Therefore, the positive news does not meaningfully improve the risk/reward balance, supporting a stance of maintaining or trimming positions rather than aggressive buying.

Thesis delta

The new results reinforce the IET growth trajectory, addressing a key watch item from the DeepValue report and potentially reducing near-term downside risk if this performance persists. However, with the stock still trading at a significant premium to DCF and earnings quality concerns unresolved, the core 'POTENTIAL SELL' thesis remains unchanged, as valuation overhang outweighs operational improvements.