Is BG Group plc Still A Buy After The 2013 FTSE Bull Run?

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 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) still offer good value, after five years of market gains.

Back to basics

BG shares have beaten the FTSE this year, gaining 19%. However, the firm’s share price has risen by ‘just’ 33% over the last five years, mostly because BG’s share price remains lower than it was before last October’s third-quarter results, when BG’s management admitted that production would remain flat in 2013.

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”.

Do BG Group’s shares currently offer good value for potential buyers?

Ratio Value
Trailing twelve month P/E 16.0
Trailing dividend yield 1.4%
Operating margin 38.1%
Net gearing 38.4%
Price to book ratio 2.0

BG Group’s valuation is certainly less demanding than it was a couple of years ago, when investors were expecting rapid year-on-year growth from the firm. After some painful readjustment, BG shares now reflect a more realistic future, in my view — slow but steady growth as fewer, larger, assets are developed and brought into production.

BG Group’s dividend yield has always been poor, but this could change from 2015, when capital expenditure should start to drop and cash flow should increase significantly.

2014 could be a bumper year

Forecasts suggest that BG Group could see a 9% increase in revenue next year, as new production in Brazil and elsewhere generate stronger cash flow. Earnings are expected to rise by a similar amount, making BG’s shares look quite reasonably priced against the wider market:

2014 Forecasts Value
Price to earnings (P/E) 14.7
Dividend yield 1.5%
Earnings growth 9.0%
P/E  to earnings growth (PEG) 1.6

BG’s 2014 prospective yield of 1.5% may not be a very exciting prospect, but the quality and scale of the firm’s key assets — in Brazil, Australia and Tanzania — suggests to me that future dividend growth could be impressive, as long as BG can keep its capex levels under control.

I believe that BG Group’s recent strong performance is likely to continue in 2014, and rate the firm’s shares as a buy.

Although I believe that BG shares will deliver further gains for patient investors, I'm pretty sure they won't repeat the triple-bagging, 340% gain they've delivered for BG shareholders since 2003 -- BG is just too big.

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> Roland does not own shares in BG Group.