Company results are coming thick and fast, and I’m looking at three potential bargains from today’s crop of announcements.
I rate Tullow Oil (LSE: TLW) as a buy — albeit at the higher end of the risk/reward spectrum — after its half-year report this morning.
Looking first at the risk, which is, in a word, debt. The company reported net debt of $4.7bn at 30 June, up from $4bn at 30 December and $3.6bn a year ago. Tullow’s market cap is £1.8bn ($2.4bn) at a share price of 200p. Ordinarily, I wouldn’t give more than a passing look at a company whose market cap is dwarfed by its debt (rising debt at that), even if its lenders are highly supportive, as Tullow’s clearly are.
However, what attracts me to the company at this stage is imminent first oil from its giant Ten Project, which will increase the group’s net production by 60% when it reaches capacity around the end of the year. The facility will go from being a cash drain to a cash gusher, even with the oil price in the $40s a barrel. Deleveraging the balance sheet will begin and the long-term rewards could be tremendous for investors.
ITV (LSE: ITV) has been knocking out earnings growth of 20%-plus in recent years. However, that’s set to moderate. First-half growth reported by the FTSE 100 firm this morning was 10%. The question is, with the shares trading at 195p — over 30% down from their 52-week high — is the stock good value for the lower growth expectations? And what of the risks of Brexit?
First-half television advertising revenue was flat, and analysts expect post-referendum uncertainty to weigh on ad spend going forward. However, the company has shown its confidence by increasing its interim dividend by 26%.
The board says it has put in place “a robust plan to allow us to meet the opportunities and challenges ahead”, including a £25m reduction in overheads for 2017. Together with strong growth in non-advertising revenues, I believe the company is well-positioned for the future.
A modest P/E of 11.5, based on annualised first-half earnings, seems an ample discount for the risk of some reduced ad spend. And with a prospective 3.7% dividend yield, I reckon the shares are worth buying.
Rightmove (LSE: RMV) is another company that has been knocking out annual earnings growth of over 20%. Furthermore, it reported latest first-half growth not much shy of that at 19%, and management expressed confidence in delivering full-year expectations.
However, this is partly due to the visibility (at least in the short-term) of Rightmove’s subscription model, and I do have some concerns about how the company will fare, if a more challenging trading environment emerges in the wake of the EU referendum. For example, I fear Rightmove may not be able to go on squeezing more revenue from each advertiser at the rate it has been.
While the company says it’s positioned well “providing that housing transaction volumes do not take a sharp downward turn,” I think even a more modest downturn could cause the market to reconsider Rightmove’s high valuation: a P/E of near 30, based on annualised first-half earnings and a share price of 4,100p.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended ITV and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.