Baker Hughes enjoys strong leverage to the current oilfield cycle, being the leader in a number of product and service categories. More than 70% of Baker Hughes revenue comes from products and services where it has the number 1 or 2 market share. Management has made steady progress over the last few years in repositioning the company by divesting non-core assets and instituting greater capital discipline.

On relative valuation grounds, Baker Hughes shares are attractive at current levels, compared to its large-cap peers. We believe that the new BHI deserves a relatively modest valuation discount to Schlumberger Ltd. (SLB), if at all, compared to the current level. This is the primary reason for our continued positive outlook for the stock. Our new $95 price objective, raised from $90 before, is based on 2009 P/E and EV/EBITDA multiples of 15.5x and 8.1x, respectively. Our target multiples are well within historical trading ranges for the stock.

Astec Inds Stays on Flat Road

Astec Industries, Inc. (ASTE) is a leading manufacturer and marketer of equipment used in each phase of road building. The company reported Q108 EPS of $0.78, slightly above our estimate of $0.77 and up 13% y-o-y, primarily led by a 22% increase in sales attributable to a weak dollar resulting in higher international sales, market acceptance of new products, improving market share and increasing sales of recycling equipment.

The company's commitment to research and development has led to several new product launches and double-digit sales growth. As its customers look to spend higher budgets on environment-friendly, road-paving equipment, we are excited about the new Double Barrel Green system. This, in conjunction with strong international sales growth, should drive 2008 EPS growth of 12.3%. While the fundamental story is positive, we reiterate our Hold recommendation on ASTE due to valuation.

The company believes the legislation passed by President Bush in the August 2005 highway funding bill favorably impacts the purchasing decision of its customers. Outside the positive fundamentals in the domestic economy, the international economies are also seeing growth. We are forecasting double-digit international sales growth for the foreseeable future. We are very excited about the potential of three product offerings.

Despite the positive factors we have a few concerns, including the potential weakening of asphalt demand, and the rise in crude oil and steel prices. We expect these trends to continue and steel prices to rise further.

We expect long-term earnings growth rate to be in line with the industry median growth rate. Consequently, we expect ASTE to command the industry multiple, which leaves no room for significant multiple expansion from the current level. At around a forward P/E multiple of about 11.3x our 2008 EPS estimate, our price target is $32.00.