Has This Bear Market Made BP Plc, Tesco Plc, And Reckitt Benckiser Group Plc Bargain Buys?

Many heavily-indebted pureplay exploration and production oil companies are beginning to face questions over their ability to survive a sustained period of low crude oil prices, which are down 70% since mid-2014. Although diversified major BP’s (LSE: BP) own shares are off 35% over this period, there’s no doubt that the company will survive this low-price environment relatively unscathed. 

Although the $5.2bn loss in 2015 was its largest ever, the long-term outlook for BP remains bright. A gearing ratio of 21.6% shows that the company has significant room to tap debt markets if need be over the medium term. Alongside record profits at downstream refining assets, totalling $7.5bn last year, the 8.2% yielding dividend should be safe even if crude prices remain in the $30 range for another 12 to 18 months. The dividend returned $6.7bn in cash to shareholders last year and while I would rather see this money spent buying up distressed assets on the cheap, it has provided a cushion for share prices.

For long-term investors, I believe shares of BP are beginning to look like a relative bargain. The company has reset costs quicker than competitors due to payments related to the Gulf of Mexico oil spill, and at $60/bbl will be fully break-even, dividend included. Combined with an attractive base of assets, high dividend and very healthy balance sheet, I believe buying BP at a relatively cheap 14 times forward earnings could be a great investment.

Keep your distance?

BP’s shareholders can hearten themselves with the fact that oil prices will inevitably begin moving upwards again. However, for grocery giant Tesco (LSE: TSCO) the long-term outlook for the grocery industry remains dim. Trading profits at Tesco fell a full 58% year-on-year, while revenues declined 3% over the same period. The figures highlight the core problem for Tesco: competition from low-price rivals eating into margins. Trading margins were down to a meagre 1.07% in the UK, nearly 4% lower than the previous year.

Alongside falling profits, Tesco is in worse shape than competitors such as J Sainsbury due to its massive mountain of debt. Net debt and pension obligations now total £12.3bn, up 2.6% during the year. Falling revenue, drastically slashed margins, high indebtedness and a bleak industry future have me keeping my distance from Tesco shares for the time being.

Powering ahead

While BP and Tesco are facing headwinds outside their control, Reckitt Benckiser (LSE: RB) appears to be an unstoppable earnings juggernaut unhindered by faltering economics across the globe. The consumer goods giant’s shares rocketed 9% this week on the back of strong 2015 results. Year-on-year constant currency revenue increased 5% and net income rose 8%. Management’s cost-cutting plans are also humming along nicely and operating margins bumped up 2.5% on the year.

The outlook for the company is quite bright as it improved sales in emerging markets by 9% despite economic turmoil in key markets such as China and Brazil. With emerging growth markets still relatively untapped, I believe RB will continue to reward shareholders for years to come. Unfortunately for investors looking in from the outside, I’m not the only one who shares this belief and the shares are trading at a very pricey 24 times forward earnings. But for investors with a long investing horizon, the underlying quality of the company should outweigh short-term valuation concerns.

I'm not the only one who's bullish on Reckitt Benckiser. In fact, it was recently named one of the Motley Fool's Five Shares To Retire On.

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Ian Pierce 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.