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How Petrofac Limited Could Rise By 50% From Here

Petrofac Limited (LSE: PFC) shares fell by more than 25% on Monday, suggesting that investors should pay heed to the old stock market adage that profit warnings come in threes.

Until yesterday, Petrofac had only issued two profit warnings…

I have to admit I’ve been caught out myself — I bought Petrofac at just over 1,000p earlier this year — but despite yesterday’s news I remain bullish, and believe the shares are now a very strong buy.

1. Now it really is cheap

Yesterday’s update pencilled in post-tax profits of around $500m for 2015. This equates to around $1.45 per share, or 92p — giving a 2015 forecast P/E of just 9.1, at the current 840p share price.

This looks pretty cheap to me, especially as a dividend cut is not a foregone conclusion, as the Petrofac’s current dividend of $0.66 per share should be more than twice covered by earnings next year.

Petrofac shares currently offer a prospective yield of around 5%, making income a key attraction for new investors.

2. 50% upside

Secondly, I believe that Petrofac shares could realistically rise by 50% from their current levels.

The firm’s order book is currently at a record high of $21bn, and includes a substantial amount of work with national oil companies in the Middle East. As a result, Petrofac should be less exposed to volatility caused by the falling oil price than some of its peers, and I believe that the outlook beyond 2015 is quite strong.

Current consensus forecasts suggest Petrofac will deliver earnings per share of around 107p this year.

If the firm can return profits to these levels post-2015, a medium-term P/E of 12 does not seem unreasonable — and would equate to a share price of 1,284p, 50% higher than today’s share price.

3. Management aligned with shareholders

The final point in favour of an investment in Petrofac is that the firm’s founder and chief executive, Ayman Asfari, has an 18.2% shareholding, whose value will have been seriously dented by this year’s decline.

Mr Asfari’s dividend income from these shares was roughly 10 times greater than his salary and bonus last year, so I suspect he will be keen to protect his dividends and repair the damage done to the value of his shareholding.

This suggests to me that Mr Asfari’s interests are very closely aligned my own, as a Petrofac shareholder.

Today’s best buy?

I rate Petrofac as a strong buy, but there’s no doubt that if the price of oil falls further, oil stocks like Petrofac could suffer further downgrades.

Until the picture becomes clearer, it might be wise to focus on income investments that are not too closely linked to commodity prices, such as the five stocks profiled in "5 Shares To Retire On".

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Roland Head owns shares in Petrofac. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.