City analysts are forecasting terrific earnings growth for some natural resources companies this year and next. In the FTSE 100, oil giant BP (LSE: BP) is a case in point, while earnings are also forecast to soar at FTSE 250 silver miner Hochschild (LSE: HOC).
Here, I’ll look at the valuation and prospects of the two companies, and give my view on whether they are prime candidates for investment today.
Value in oil
I’m expecting upbeat first-quarter results from BP tomorrow, following on from its strong performance in 2018. City analysts are currently forecasting high-teens earnings growth this year, and more of the same for 2020.
BP is the third-largest company in the FTSE 100, and, of course, it’s always worth comparing its valuation and prospects with number-one-ranked Shell. The table below shows their price-to-earnings (P/E) ratios, price-to-earnings growth (PEG) ratios, and dividend yields, based on forecasts for 2019 and 2020.
| Recent share price | P/E (2019) | P/E (2020) | PEG (2019) | PEG (2020) | Yield (2019) | Yield (2020) | |
| BP | 556p | 13.1 | 11.2 | 0.8 | 0.7 | 5.7% | 5.8% |
| Shell | 2,452p | 11.9 | 10.3 | 2.0 | 0.6 | 5.9% | 5.9% |
As you can see, aside from on 2019 PEG, Shell has the superior value metrics, with lower P/Es both years, lower 2020 PEG, and higher yields both years.
Having said that, BP’s value credentials are pretty strong in their own right. The P/Es are very reasonable, the PEGs are comfortably to the good value side of the PEG ‘fair value’ marker of 1, and the dividend yields are well above the Footsie average, and only a tad lower than Shell’s.
I wouldn’t want to put anyone off investing in BP, but for me the table confirms why Shell is my sector pick, and why I think it’s still a brilliant buy.
High growth miner
The strong earnings growth forecast for BP and Shell over the next couple of years is eclipsed by that forecast for Hochschild. Analysts are expecting the miner’s earnings to increase 100% this year, followed by 30% in 2020.
Running the same valuation numbers as I did for the oil companies, you can see that Hochschild is a rather different investment proposition.
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Recent share price | P/E (2019) | P/E (2020) | PEG (2019) | PEG (2020) | Yield (2019) | Yield (2020) |
| Hochschild | 180p | 23.2 | 17.8 | 0.2 | 0.6 | 1.7% | 1.7% |
Clearly, it is not a stock for investors seeking a high income, with its dividend yield being a fraction of the yields on offer at BP and Shell. The miner also has much higher P/E ratings than the oil giants.
Now, a high P/E is not in itself a bad thing. It simply means the market is expecting high earnings growth. A stock with a high P/E can still be undervalued, which is where the PEG ratio is so useful. Hochschild’s PEGs of 0.2 for 2019 and 0.6 for 2020 suggest the P/E is very good value relative to the forecast earnings growth.
One of the things that characterises miners and oil companies, is that it can be many years before you see the wisdom (or foolhardiness) of today’s capital allocation decisions. In this respect, I’m reassured by the fact that current chairman, and major shareholder, Eduardo Hochschild, is the great nephew of Mauricio Hochschild, who founded the company in 1911.
Such family dynasties tend to be masters of planning and allocating capital with a long-term horizon. This, together with the attractive PEG valuation, makes the stock look very buyable to my eye.
