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We are downgrading our recommendation on Baker Hughes Inc. (BHI) to Underperform from Neutral ahead of its fourth quarter results. The company's third-quarter 2012 results suffered from the discrepancies in the North American Pressure Pumping business. Moreover, weak activity in several important markets of Baker Hughes resulted in an unfavorable mix.

The company expects its North American revenue as well as profitability to be below expectations during the fourth quarter due to a slowdown in drilling activity in North America and lingering weakness in its pressure pumping business. Baker also expects its overseas operations to be hurt by a weak rig count in Brazil and Columbia, as well as delays in the North Sea and Iraq operations.

Given these headwinds, we expect the shares of Baker Hughes to be under pressure in the near future Our $40 price objective is based on the 2013 P/E multiple of 12.7x. Our target multiples are well within the historical trading range for the stock.

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