Here’s Why BP plc Is A Truly Compelling Buy Right Now

BP plc (LON:BP) could be worth much more than its current value, argues this Fool.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Here’s why buying BP (LSE: BP) at 431p a share today could be one of your best investment decisions ever — particularly if you are after a balanced mix of growth and yield. 

Earnings Per Share 

BP is expected to report earnings per share (EPS) of $0.37, $0.52, $0.63 over the next three years, which says a lot about its growth potential, and implies forward earnings multiples of 18x, 12.9x and 10.6x in 2105, 2016 and 2017, respectively, on a recurring basis. 

Should you invest £1,000 in Games Workshop right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Games Workshop made the list?

See the 6 stocks

This is based on a constant number of shares outstanding, and net income rising from $7.7bn in 2015 to $12bn in 2017, which is a realistic economic performance assuming BP ‘s net margin stands at 3.5% over the period — a level of net profitability after taxes that would be consistent with its normalised trailing figures. 

Between 2014, when BP reported basic and diluted EPS at $0.20, and 2017, EPS from core operations will very likely grow at 85%, 41% and 21% annually, delivering a declining growth rate over the period.

Here’s where the opportunity lies.

Does BP Actually Trade In Bargain Territory? 

In the good years, BT’s net margin was much higher at 6.7%/6.9%, and now Brent prices are more likely to rise than to fall from $60 a barrel. 

Furthermore, 2014 impairment and losses on the sale of businesses and fixed assets stood at $8.9bn — that’s a multi-year high.

Currency risk looks manageable, too. 

I won’t bore you with the math behind the net present value estimates for cash flows, but under a base-case scenario, a small rise in BP’s profitability could render its shares much cheaper than forward trading multiples suggest — some 20% to 30% cheaper!

Free Cash Flow & Divvy 

Based on BP’s reduced capex projections, its free-cash-flow (FCF) yield is likely to hover around 4% and 6% in 2015, for an implied 2015 FCF of between $4.9bn and $7.3bn, which is a rather realistic FCF target range — and indicates that its dividend policy is conservative in spite of a 5.9% forward yield. 

If anything, such an attractive yield signals that BP trades well below fair value. 

Finally, the oil spill. 

 “Drawing a line in the sand on Macondo,” was the subject of an email from a big commodity house last week.

There’s nothing more to fear on this front following the announcement that BP had agreed to settle for up to $18.7bn, with payments spread over 18 years, while currency risk still worries me a bit (BP reports in US dollars but has worldwide operations), but should not bring any particular surprise over the next 18 months.

Obviously, BP is also a bet on rising prices for the black gold. 

In its Q1 results on 28 April, BP noted that “oil and gas prices in the quarter were sharply lower than a year earlier. Brent crude averaged $54 per barrel compared with $108 in 1Q 2014. This was the lowest quarterly average Brent price since 1Q 2009.” Interim 2015 results will be released on 28 July, and you may well be tempted to snap up its shares before then.  

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »