Is BP plc Less Risky Than GlaxoSmithKline plc & ARM Holdings plc Right Now?

Oil major BP (LSE: BP) reported a decent set of quarterly results on Tuesday when it confirmed its dividend policy, and its stock bucked the trend of a declining market. Although not unexpected, its rally has been truly impressive in recent weeks, and has not been too different from that of GlaxoSmithKline (LSE: GSK) and ARM (LSE: ARM) — but is BP as overvalued as Glaxo and ARM seem to be? 

BP’s Rally Is Not Over

BP’s share price has risen 27% since the multi-year low it recorded in mid-December, and is up 16% this year — that’s a lot for a cyclical business operating in an environment where average oil prices are about 50% lower than in the same period one year earlier.

Between December 2013 and May 2014, BP traded in the 473p–508p range, and it currently trades at the low-end of that range. Its valuation is in line with the average price target from brokers, but analysts such as those at Goldman Sachs have become increasingly bullish. 

BP’s balance sheet, profit and loss, and cash flow statements all point to a solid company — one that promises sustainable, market-beating dividends, and which has shown it can adapt swiftly to fast-changing macroeconomic conditions.

As part of its divestment programme, it still has a few billions of assets to sell, which supports the investment case. I do not believe in a takeover of the group, and I don’t think the shares price in a takeover premium. Based on fundamentals, its trading multiples point to a 25% upside from this level into 2016. 

And that’s also the kind of rally you should expect from Glaxo, if its managers get their priorities right. 

GlaxoSmithKline Must Deliver To Deserve A Premium 

Just like BP, Glaxo has surged from its lows in December, to record a 24% gain to 10 April, but it has lost nine percentage points since — about £1 a share.

Glaxo is up 12% this year and trades in line with market consensus estimates. While more upside into the end of 2015 is possible, it’s much more expensive than BP, based on trading multiples for 2016 and 2017. 

Of course, Glaxo is more defensive than BP, but while BP’s earnings cycle may have bottomed out, several risks still weigh on Glaxo, spanning China and large divestments. Quarterly results are due on 6 May and may provide a fillip to the stock, but long-term value hinges on the spin-out of its HIV drugs business.

ARM Is Not Expensive 

If you had followed my suggestion one year ago, you’d have recorded a 37.5% performance over the period, excluding dividends.

Recent results showed a terrific growth rate and a decent level of profitability, both of which are more relevant than ARM’s own valuation (40x forward earnings) when it comes to assessing the investment case.

The chip designer is not as vertically integrated as Intel, and that’s where its strength resides. Trading multiples point to downside, some pundits argue, but if ARM maintains its projected growth rate, the stock could easily hit 1,650p by May 2016. 

At 1,164p, ARM currently trades around its record highs and is up 17% this year. 


Want to find more value opportunities in less cyclical sectors? 

A few outstanding businesses, whose shares boast strong yields and have greatly outperformed the index in recent months, have been included a free value report by our Fool analysts --  find out more by simply clicking here right away! 

Our research shows how to beat volatile market conditions and how to select value opportunities offering the right balance between growth and yield. The names of a public transport operator, whose stock is up 6% in the last three months, and a consumer company (+13% in 2015) are fully disclosed here for a limited amount of time and without further obligation.

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