Why I Would Buy Big Yellow Group plc But Sell BP plc And Royal Bank of Scotland Group plc

Today I am running the rule over three London-listed giants.

Big Yellow Group

Storage specialists Big Yellow (LSE: BYG) have cheered the market in Tuesday business and were recently dealing 5.3% higher on the day. The company announced that revenues surged 17% in the year concluding March 2015, to £84.3m, a result that propelled adjusted pre-tax profit 35% higher to £39.4m.

The Surrey firm announced that “demand growth across our network [reflects] improved economic growth not just in London, but within the UK as a whole.” As well, Big Yellow is also benefitting from a chronic space shortage as householders hold onto their possessions, a particular problem in busy metropolitan areas. The City expects these factors to drive earnings 14% higher in both 2016 and 2017.

At face value the business may not be a brilliant value choice, however, with P/E multiples for these years registering at 21.2 times and 18.7 times respectively, some way above the watermark of 15 times which signals attractive bang for one’s buck. But market-beating dividend yields of 3.8% for 2016 and 4.3% for 2017 more than offset this shortfall in my opinion, and I believe Big Yellow’s position as leader in an growing market should keep blasting both earnings and payouts skywards.


Conversely, I reckon that a poorly outlook for the oil sector leaves BP (LSE: BP) (NYSE: BP.US) in severe danger. Even though a solid uptick in crude prices has boosted sentiment in recent months — the Brent index has risen around $20 since the turn of the year and was recently dealing around $65 per barrel — I believe that resilient production across the OPEC cartel, as well as from Russia and the US, should keep prices hemmed in for some time to come.

The oil recovery has coincided with a steady decline in the number of North American rigs in operation. But as Edison notes, US stockpiles remain doggedly high while rig productivity continues to improve. Output at the critical Permian field, responsible for around a third of onshore production, averaged 265,000 barrels per day, up from 200,000 barrels at the start of the year. Against this backdrop I believe oil prices could shuttle lower again should the global economy stall.

At present BP is expected to record earnings growth of 92% and 28% in 2015 and 2016 respectively. Not only are these elevated figures extremely fanciful in my opinion, but consequent P/E multiples of 17.9 times and 13.9 times for these years fail to factor in the huge risks facing BP, problems which could result in even more project divestments and capex reductions. I would consider a reading around or below the bargain benchmark of 10 times to be a fairer level when you take into account BP’s travails.

Royal Bank of Scotland Group

Embattled banking play Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is expected to enjoy stunning earnings growth in the immediate future. Indeed, the City expects the bank to bounce from earnings of 0.8p per share last year to 28.2p in 2015, leaving the business changing on a P/E ratio of 12 times.

Still, I believe that the effect of underperformance on the High Street and overly-aggressive asset shedding puts these forecasts under huge scrutiny — indeed, Royal Bank of Scotland saw revenues tumble 14% lower during January-March, to £4.3bn. And expectations of a 10% bottom-line slide in 2016 suggests that this year’s anticipated uptick could prove a rare exception, and pushes the earnings multiple to an even-less appetising 14.1 times.

When you also factor in the huge expense of its cost-cutting scheme and escalating misconduct charges, it is hard to justify investing in Royal Bank of Scotland in my opinion, particularly as industry peers like Lloyds and HSBC trade on cheaper forward P/E readings of 10.7 times and 11.2 times and have much better growth prospects.

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