A number of shares in the FTSE 100 and FTSE 250 have fallen in recent months. One major decliner has been oil and gas producer Tullow Oil (LSE: TLW). It has recorded a fall in its share price of 32% since early October, with a declining oil price being a key reason for this. The price of oil has dropped by 30% during the same period, with concerns surrounding the world economy weighing on investor sentiment.
As such, Tullow Oil now offers a wide margin of safety, with its valuation appearing to be relatively low. However, could a FTSE 100 share which reported improving performance on Tuesday offer better growth potential?
The company in question is Total Quality Assurance provider to a variety of industries, Intertek (LSE: ITRK). It released a trading update for the first 10 months of the 2018 financial year, with revenue increasing by 4.8% to £2,315.7m. It was able to deliver broad-based organic revenue growth across its divisions, while maintaining continued operational discipline on margin and cash management. It also reported that the Alchemy acquisition is integrating well, while it is expanding its fast-growing Assurance business.
Looking ahead, Intertek is expected to report a rise in earnings of 9% next year. This suggests that its strategy is sound, and that it is capitalising on what is a $250bn global quality assurance industry, which the company believes has attractive structural growth prospects.
However, with the stock having a price-to-earnings (P/E) ratio of 24 despite its market value having fallen by 22% in the last four months, it appears to lack a margin of safety at the present time. As such, there may be better opportunities available elsewhere in the FTSE 350.
One such opportunity could be Tullow Oil. Although the company’s shares may remain volatile in the near term, they seem to offer capital growth prospects in the long run. Following its decline, the stock now has a P/E ratio of around 9 when using the current year’s forecast earnings figure. And with the stock’s bottom line due to rise by 11% next year, it could offer turnaround potential.
Alongside this, the strategy being pursued by the business may prove to be sound. It is aiming to reduce debt levels over the medium term, and this may create a stronger entity that is better able to cope with the volatility of the oil and gas industry. And with it continuing to invest in its exploration activities, its long-term growth appeal may remain impressive.
While the oil price may decline further amidst a period of heightened uncertainty for investors, Tullow Oil appears to have a wide margin of safety and the potential to deliver improving levels of profitability. Although it may not be of interest to more risk-averse investors, its risk/reward ratio could become increasingly appealing in my opinion.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.