Data equipment company Vertiv (VRT 2.44%) and oil and natural gas equipment and services company Baker Hughes (BKR 1.01%) reported excellent first-quarter earnings in the latter half of April. In doing so, they dispelled investor fears and signaled that they were on course to deliver solid earnings growth and excellent returns for the rest of the year and beyond. Here's why these two companies' shares are currently great values. 

Vertiv is silencing the doubters

The data equipment provider has heavyweight backing in the form of activist value investor Starboard Value, and its executive chairman is longtime Honeywell CEO Dave Cote. However, though it operates in desirable end markets, its operational performance hasn't always lived up to its potential. For example, colocation data center companies like Equinix and Digital Realty Trust are guiding for double-digit percentage growth this year, and the cloud/hyper-scale market remains in growth mode with companies like Amazon, Microsoft, and Alphabet looking to increase their market shares.

While end-market demand is fine, Vertiv was behind the inflation curve in 2021 and 2022, and spent much of 2022 raising prices to offset its higher costs. After shocking the market in early 2022 by revealing an earnings miss for full-year 2021, it managed to push through pricing increases as expected in 2022, but it still missed its guidance ranges for working capital and free cash flow. 

Vertiv delivers

Consequently, heading into the first-quarter earnings report, investors were concerned that there might be some bad debts out there, or that some customers would be ready to cancel orders due to the price increases. However, Vertiv's working capital and cash flow easily surpassed its guidance for the quarter. Management also raised its full-year margin and operating profit guidance, and maintained its guidance range for $300 million to $400 million in free cash flow for the full year.

A data center.

Image source: Getty Images.

With a market cap of $5.6 billion, Vertiv trades at 16 times the midpoint of its free cash flow guidance, and that's too cheap for a company with such excellent top-line growth prospects. Meanwhile, if the Starboard Value thesis is correct and Vertiv has a medium-term opportunity to grow earnings by raising margins to the level of its peers, then it has excellent bottom-line growth prospects too. 

Baker Hughes, a short history

Like Vertiv, Baker Hughes operates in attractive markets, but hasn't always lived up to its potential. The company's origins lie in the oil and natural gas equipment acquisitions that General Electric made in the previous oil boom. Those businesses became part of GE's oil and natural gas segment, which was later merged with Baker Hughes. 

The big idea was that the combination of GE's downstream, surface, sub-sea, and machinery solutions would complement the former Baker Hughes's drilling services, well evaluation, and completion systems solutions to create a full-stream oil and natural gas equipment and services company. Meanwhile, GE would add its digital capability across the new business to enhance its offerings. In addition, Baker Hughes had significant exposure to areas like LNG and "new energy" activities like carbon capture and carbon dioxide compression.

The merger of GE's oil and natural gas business with Baker Hughes was completed in 2017, but then, GE changed course and spun off the entire segment under the Baker Hughes name in 2019. And GE recently announced that it had sold off its remaining stake in the company.

Baker Hughes is turning its fortunes around

Unfortunately, Baker Hughes hasn't entirely lived up to the potential expected in the original merger. After a period of disappointing execution, management decided to go from four operating segments to two -- oilfield services and equipment (OFSE), and industrial energy and technology (IET) -- in autumn 2022, with the aim of cutting annual costs by some $150 million. 

While it's natural that investors should feel some skepticism toward Baker Hughes -- not least because it has disappointed before -- its end-market conditions (led by energy prices) are much more favorable than they were when GE completed the acquisition. 

An oilfield worker

Image source: Getty Images.

Those positive conditions were reflected in last month's earnings report. Investors learned Baker Hughes was on track to hit (and possibly surpass) its cost-cutting target, and that its LNG and new energy businesses are growing well. 

With the price of oil still above $75 a barrel (even in an economy where growth is slowing), cost-cutting measures on track, and Baker Hughes generating order growth of 12% (with particular strength in LNG and new energy), management looks to be on track to hit the upper end of its guidance ranges in 2023. As such, Baker Hughes stock is an excellent way to play the energy markets now.