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Why BP plc looks set to be beaten by Informa plc ord 0.1p

I reckon better investment potential exists in some of the 70 or so smaller constituents of the FTSE 100 than exists in the 30 largest firms in the index.

In my continuing hunt to find them, today, I’m comparing oil giant BP (LSE: BP) with specialist publisher and events organiser Informa (LSE: INF).

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Further bumps ahead?

BP’s shareholders have endured a bumpy ride over the last several years, with major events such as 2010’s Gulf of Mexico oil spill disaster and the recent plunge in the price of oil keeping a lid on its share price progress.

A share price of 384p or so is near to the lower end of the  300p–650p range that BP has traded within for around 10 years. Over that time, there is a definite downtrend apparent on the firm’s share price chart.

BP often attracts investors because of its dividend. Yet capital losses can offset income gains with a cyclical firm like this and I don’t think it’s worth the bother trying to time a purchase with BP.

The firm’s operations will always be challenged by fluctuating commodity prices, which tend to move in cycles. The price of oil reacts to macroeconomic conditions and supply and demand dynamics. BP has very little control over the prices it achieves for its products, and that makes earnings unpredictable, and the outcome for BP’s shareholders uncertain over normal investing timescales, which are measured in years.

A bit pricey

At 384p or so, BP’s forward price-to-earnings (P/E) ratio runs at just under 14 for 2017, and the forward dividend yield is around 7.1%. City analysts following the firm expect earnings to rebound 115% that year and to cover the dividend payout just once. Yet that outcome is dependent on the price of oil remaining firm, which is far from certain.

To me, BP’s valuation is stretched for a cyclical firm during benign economic conditions. I’d be happier with a P/E rating closer to eight and a doubling of the dividend cover from earnings, which implies a lower yield. A cyclical firm like BP will never make a decent buy-and-forget investment so I’m looking at firms in other sectors.

Steady trading

Informa has built a steady business producing and supplying academic books and journals, data-driven intelligence publications, services, exhibitions, conferences and learning platforms. A record of consistent single-digit growth in earnings suggests the firm is doing many things right and a 350% increase in the firm’s share price over the last seven years has rewarded investors well for their faith in the company.

The firm’s gross borrowings are around 2.7 times the level of full-year profits before tax, which seems reasonable —  as long as growth continues. At the recent share price of 642p, Informa trades on a forward P/E rating of almost 14 for 2017 and the forward dividend yield runs at 3.4%. City analysts following the firm expect earnings to expand by 6% this year and by 4% during 2017, which should then cover the dividend payout more than twice.

Going forward, I’d rather take my chances with steady Informa than erratic BP.

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