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Is The Reward Worth The Risk With BP plc, ASOS Plc & Stagecoach Group Plc?

BP (LSE: BP) has been trading around 450p for some time now, but I reckon its stock may soon test 500p — before rising to 550p! Its fair value is 600p, in my view.

Elsewhere, ASOS (LSE: ASC) is a less obvious equity investment. It reported upbeat sales figures recently, which contributed to boosting its equity value. Although this is not a bargain, it could still offer value at around 3,700p.

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If you don’t fancy the fashion retailer, you ought to consider Stagecoach (LSE: SGC) — a more attractive value play that is bouncing back from its lows, as I expected!

BP: The Bottom For Earnings? 

BP’s first-quarter earnings release is due on 28 April. As a consequence of plunging oil prices, revenue will be significantly lower than last year, of course, but BP has cut costs and slashed investment accordingly, so I am inclined to suggest that we may be very close to the bottom for its earnings cycle. 

BP’s fourth-quarter replacement cost result was a loss of $969m, compared with a profit of $1.5bn a year earlier — that was its worst performance since the Deepwater Horizon spill in 2010. Leverage is manageable and, if I am right, cash flow per share will continue to rise at a compound annual growth rate of between 10% and 15% in the next 24 months. The dividend should be comfortably covered by earnings by the end of this year, too. 

At 12x and 10x earnings for 2016 and 2017, respectively, BP remains a compelling value proposition and, based on its net worth, a price target of 600p is possible if you are looking for a long-term trade. This assumes no takeover premium, and that Brent will more likely rise to $80 a barrel than fall to $50. Finally, as part of its divestment programme, BP has more than $5bn of assets to sell to strengthen its balance sheet. 

ASOS vs Stagecoach

ASOS proved it can still surprise investors when it reported its H1 results last week, which essentially showed the business is struggling to preserve margins — which was widely expected — but is growing revenues at a very fast pace.

Sales in the core UK market rose about 30% in six months to almost a quarter of a billion pounds, while trends for sales generated overseas are encouraging. Investors know that margins may be on their way down, but if ASOS continues to grow its top line, its valuation will likely continue to rally. 

“With our continued investment in our international price competitiveness gaining traction, momentum in the business is building. This gives us confidence in the outlook for the second half and that full-year profit and margin will be in line with expectations,” CEO Nick Robertson said last week. ASOS shares are not cheap, but you may well be tempted to add them to your diversified portfolio right now — betting on a rise to 4,700p/5,500p from 3,750p!

Alternatively, Stagecoach is profitable and its debt pile is manageable, which is not always the case in the bus and rail sector. Based on forecasts for earnings in 2016 and 2017, its shares trade in the region of 10x, which is a rather low valuation for a stock that also offers a forward yield of 3%. 

At around 353p, Stagecoach trades some 50p below the average price target from brokers, but if bullish estimates for growth are met, upside could be in the region of 30%, for a price target of 460p.

It looks like investors may have overreacted to its recent profit warning, with the shares up 5% since 10 March. Stagecoach has outperformed the FTSE 100 by more than three percentage points in the last four weeks, and I would expect such a performance to last until the end of the year. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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