The Razor’s Edge
2-Year Price History
Recent Price
(2/6/2009)
$45.54
52-Week Price
$37.57 – $77.69
Market Capitalization
$143.1 Billion
Most Recent Dividend
$2.54
About BP PLC – Shs American Deposit.Receipt Repr.6 Shares
BP PLC – Shs American Deposit.Receipt Repr.6 Shares is considered to operate in the Basic Materials
sector. They specifically operate in the Major Integrated Oil/Gas
business segment contained within the Energy industry.
The Company is engaged exploration and production’s activities include oil and natural gas exploration and Renewable businesses.
Ockham’s Rating
As frequent users of Ockham Research are aware, we strive to adhere to the principal of Ockham’s Razor. This company ideal drives us to keep our stock analysis as simple as possible, but of course, no simpler than is necessary. It is in that vein that we focus much of our analysis on fundamental factors, peer analysis, and valuations versus historically normal ranges. However, we also apply standard deviation and volatility studies for each index and sector in order to understand more completely the risks associated with each market environment.
It is always scary to upgrade stocks in a market where everything seems to be headed downwards, but it is important to remember that these drops in price are often the best time to buy a bargain. We are not yet ready to upgrade BP as of this week’s report because the fundamentals have not crossed a strategic threshold in our methodology, but we are certainly becoming more interested in some of the value that is being uncovered in this market downturn.
It is often helpful to begin our analysis with recent price changes, the price of BP rose from $42.47 as of 01/31/2009 to a price of $45.54 as of 02/07/2009. While this increase of 7.23% was not large enough for Ockham to downgrade the stock, it does however slightly lessen the attractiveness of BP.
As of this report, there have been no meaningful adjustments in cash earnings expectations or guidance in the last week.
BP Stock Evaluation
We are reiterating our rating of Undervalued on BP at this time. As described in the Recommendation Summary, we have not seen any additional guidance or change in expectations to BP’s earnings, but we have seen a relatively significant increase in its share price of 7.23%. This increase in price is significant and should be noted as we look further into the fundamental picture of BP below.
BP Revenue
As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, BP the high and low end of the Price to Sales per share ratios are 0.73x and 0.52x respectively.
Notice that BP’s current Price to Sales per share ratio is 0.52x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $45.54, BP is 17% below where we would expect to see it. This will beneficially factor into our final analysis of BP as it is not often that this stock sinks to these levels.
BP Cash Earnings
As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of BP, Ockham views their current Cash Earnings as significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for BP, the current level of Cash Earnings compared to its historical levels helps identify where BP is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 6.51 and a historical low Cash Earnings per share ratio of 4.63, an investor can relate where value becomes optimal.
So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for BP? From the Ockham perspective, we are looking specifically at BP to see if the market is recognizing the huge disparity between BP’s past stock price to Cash Earnings ratio to today’s levels. At a difference of 34% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at BP. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.
BP Dividends
While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.
In BP’s case, the estimated annual dividend is $3.36 resulting in a current dividend yield of 7.38%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from BP against the historic high and low levels over the past 10 years. The highest dividend yield from BP over this period was 8.94% while the lowest dividend yield was 2.23% BP’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 32.14% above the median which weighs very positively on our analysis of BP.
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