Should you buy Tullow Oil (LSE: TLW) today?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at Tullow Oil (LSE: TLW) to determine whether you should consider buying the shares at 1,400p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected PE||PEG||Yield||3-yr dividend growth||Dividend cover|
|Tullow Oil||1,400||285%||17.28||1.38||0.85%||70 %||6|
The average analysts' estimate for this year's earnings per share is $0.81 (12.5% growth) and a dividend per share of $0.17 (42% growth).
Trading on a projected P/E of 17.3, Tullow Oil looks expensive when compared to its peers in the Oil & Gas Producers sector -- who are currently trading on a lowly average P/E of 9.26. Tullow's high P/E and double-digit growth gives a PEG ratio of 1.38, which implies the share price is slightly expensive for the earnings growth Tullow is expected to produce.
The dividend is poor, offering a 0.85% yield, which is currently less than a third of the Oil & Gas Producers sector average. However, Tullow has a three-year compounded dividend growth rate of 70%, implying the payout could soon catch up to that of Tullow's peers.
Indeed, the dividend is six times covered, giving Tullow plenty room for further payout growth.
Tullow looks expensive. Is this justified?
I do not like buying expensive growth stocks, and right now Tullow looks like one of those. Tullow has had an amazing past few years, but still has a growth premium rating attached to it. With earnings growth predicted to slow to a more sustainable 12.5% for 2012, I believe Tullow's share price is overstating the current profit-expansion projections.
Tullow's share-price premium is partially down to a vast portfolio of oil-bearing assets the firm has available to it. These assets do contain significant potential for Tullow. However they are still 'potential' assets -- they'll always be some uncertainty as to their exact ultimate value.
Tullow produces sizeable free cash flow, allowing it to explore without borrowing heavily. Exploration costs will be high, however, and these costs may limit cash returns for Tullow's shareholders.
After the last few years of rapid growth, Tullow Oil now looks placed for a period of slower growth. Considering this likely deceleration, plus the low yield, high share-price premium and potential exploration risk attached to the stock, Tullow, in my view does not look appealing.
So, overall, now does not look to be a good time to buy Tullow Oil at 1,400p.
More FTSE opportunities
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
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> Rupert does not own any share mentioned in this article.