2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 51% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like BP (LSE: BP) (NYSE: BP.US) still offer good value, after five years of market gains.
Back to basics
BP’s share price has kept pace with the FTSE and is up by 8% so far this year, but its performance over the last five years has been pretty feeble, as you’d expect, and BP shares are currently worth 8% less than they were in December 2008.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
BP’s Gulf of Mexico disaster in 2010 provided canny investors with the opportunity for a quick 50% profit, but the firm still looks good value today, as these figures show:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 11.0 (exc. TNK-BP sale) |
| Trailing dividend yield | 4.7% |
| Operating margin | 9.1% |
| Net gearing | 15.3% |
| Price to book ratio | 1.1 |
BP’s valuation is fairly modest, and despite the $42bn it has spent to date on dealing with the Gulf of Mexico disaster, it is still profitable and is continuing to make new oil discoveries, including the Gila discovery in the Gulf of Mexico, which BP described as “significant”.
Looked at on this basis, it’s hard to see how an investment in BP could go too badly wrong.
What about next year’s big fine?
The big event of 2014 is likely to be Judge Carl Barbier’s Clean Water Act ruling. Judge Barbier’s decision will have two parts — how much oil he thinks was spilled, and whether BP was guilty of gross negligence or not. The resulting fine could range from around $4.5bn to more than $18bn.
I don’t expect a worst-case scenario, and believe that the certainty it provides should be good for BP. City analysts seem to agree, as the latest consensus forecasts for 2014 show decent earnings growth:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 10.1 |
| Dividend yield | 5.2% |
| Earnings per share growth | 14.6% |
| P/E to earnings growth (PEG) | 0.6 |
I continue to rate BP as a buy for income and believe that it will continue to prosper — it’s worth remembering that BP is still the second-largest producer of oil and gas in the USA.
