Today I am looking at the share price prospects of two FTSE 100 heavyweights.
Oil major on the rocks
Embattled oil giant BP (LSE: BP) has had something of a year to forget in 2015, the business having tanked 13% since the turn of January. Still, a 7% advance since the start of the quarter to current levels has given troubled investors some reason for cheer.
While BP could well hang onto this quarter’s modest gains, I believe the company’s elevated share price leaves it in severe jeopardy of a shunt lower should macroeconomic or industry-specific data continue to shake investor sentiment.
Chinese PMI numbers for the manufacturing sector once again disappointed this week, the latest survey showing activity in November contract yet again. Indeed, a figure of 49.6 represented the lowest reading for three years.
And on the supply side, OPEC insiders told Bloomberg today that the group raised its production target to 31.5 million barrels per day despite the crude price languishing around six-year lows below $43 per barrel. With global inventories standing at a record high of 2.98 billion barrels, according to the International Energy Agency, the revenues outlook at BP remains as murky as ever.
The oil producer currently changes hands on a P/E rating of 16.4 times for 2015, hardly eye-watering but well above the bargain benchmark of 10 times prospective earnings, territory I feel the fossil fuel play should currently be occupying due to its high risk profile. And particularly as BP’s current earnings multiple is based on what I consider unrealistic expectations of a 61% bottom-line bounce.
Sure, some would argue that BP’s 6.7% dividend yield for 2015 should keep bargain hunters interested, created by expectations of a frozen dividend of 39.5 US cents per share. But should the bearish industry news keep on coming, BP’s payout potential is likely to face further scrutiny, a situation that could remove a critical support pillar for the share price.
Pick up a shopping superstar
Hulking household goods play Reckitt Benckiser (LSE: RB) has also enjoyed a stellar end to the year, the company having enjoyed a 4% share price bounce since the turn of October. In total the London business has seen its stock value 19% during the course of 2015.
And with good reason, in my opinion: despite fears over the impact of economic cooling on consumer spending power in crucial emerging markets, demand for Reckitt Benckiser’s products continues to steadily improve. The Slough manufacturer saw like-for-like revenues advance 7% during July-September, to £2.2bn, speeding up from the 5% rise in the prior three months.
It can be argued that Reckitt Benckiser shares some similarities with BP, however. A predicted 3% earnings rise for 2015 leaves the business dealing on a P/E rating of 26.2 times, some way above the benchmark of 15 times that is widely-regarded attractive value. And consequently poor economic releases in the coming weeks could leave it susceptible to surrendering the current quarter’s gains.
Still, I am far more optimistic concerning Reckitt Benckiser’s share price prospects, both in the short- and long-term, than I am in those of its FTSE peer.
Through prestige brands like Nurofen pain relievers and Harpic bleach, the company carries terrific pricing power that keep revenues marching skywards. And a robust balance sheet leaves plenty of scope for further organic and inorganic expansion, providing Reckitt Benckiser’s earnings outlook with an additional shot in the arm.
