BG Group plc Could Be Worth 1,562p

Gains of 20% look achievable for investors in BG Group plc (LON: BG). Here’s why…

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 15 January, 2014 10:23 am GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

As the Christmas trading statements roll out, with the inevitable mix of winners and losers, a main focus for the market in 2014 is likely to be earnings per share (EPS) growth.

This is because 2013 was the year when confidence came back into the stock market and many shares were pushed onto very high (arguably unjustifiably high) price to earnings (P/E) ratios. Therefore, at least a degree of earnings growth seems to have been priced in.

Shares that could continue to outperform could be the ones that are able to deliver EPS growth that is not only above-average, but is significantly above-average.

One such stock could be BG Group (LSE: BG) (NASDAQOTH: BRGYY.US), since its EPS forecasts make it anything but an ‘average Joe’.

Indeed, EPS is forecast to increase by 8% in 2014 (to 84p) and by a whopping 27% (to 107p) in 2015. This puts BG Group on a forward P/E of 15.6 using 2014 forecast earnings and just 12.3 if 2015 EPS is used.

Assuming the average growth in EPS for the FTSE 100 is around 6% in 2014 and 6% again in 2015, that would put the FTSE 100 on a forward P/E of 13 for 2014 and 12.2 for 2015.

So, the market seems comfortable with BG Group currently trading on a premium of 20% using 2014 earnings. Assuming BG Group continues to trade on such a premium to the market over the next year, it could mean that its P/E ratio becomes 14.6, using 2015 forecast EPS. This would mean that its shares trade at a price of 1,562p (ie, 14.6*EPS of 107p), which is 19% higher than the current share price.

Add to this a yield of 1.4% and total return for shareholders of BG Group could top 20%, with the added bonus being that dividends per share are forecast to grow at an annualised rate of 9.1% over the next two years.

This will no doubt be welcome news for investors who are attempting to combat the dual threat of inflation and historically low interest rates. However, the potential capital gain growth is the ‘main event’ for BG Group and this will inevitably be the key reason why investors look to purchase the stock.