The Two Most Undervalued Companies In The FTSE 100: Petrofac Limited And BHP Billiton plc

For value investors, there are not many opportunities in the market at present. Indeed, as the FTSE 100 trades around multi-year highs, there are only one or two shares within the index trading at valuations that look attractive.  

Two of the shares currently trading at attractive valuations are, Petrofac (LSE: PFC) and BHP Billiton (LSE: BLT) (NYSE: BBL.US) both of which appear to have been left out of the wider market’s rally. 

Undervalued but set to grow

BHP has been trading in a range now for the past few years and investors have every right to be unimpressed with the company’s performance.

Nevertheless, BHP has recently changed its strategy, slowing plans for growth, ramping up output at existing mines and paying down debt. Actually, BHP has just revealed record production figures for the nine months to March, despite slashing capital spending during 2013.

What’s more, BHP is targeting cost efficiencies of $5.5bn by the end of the 2014. Rising production and falling costs only mean one thing; rising profits.

Still, it’s not yet clear what BHP intends do with its extra cash (debt repayments and shareholder returns are both on the cards), although one thing is for sure, the company’s shares are cheaper than they should be.

At present levels, BHP is trading at a historic P/E of 12.7 and based on City estimates for 2015, the company is trading at a forward P/E of 12. Actually, City analysts currently expect that BHP will report EPS growth of 22% for 2014, implying that the company is trading at a PEG ratio of only 0.6. 

Growing backlog, essential services

Unfortunately, investors lost patience with Petrofac last year as the company failed to meet its own lofty growth targets. In addition, the market was worried about Petrofac’s contracting profit margins, especially in the onshore engineering & construction business.

Further, some were concerned that Petrofac’s entry into the specialist and highly competitive subsea engineering market, would dent profitability.

A combination of these worries sent Petrofac’s shares plunging around 30% throughout 2013.

However, Petrofac’s underlying business has performed well since these worries came to light and the company has continued to win many high profile contracts.

There is also a growing believe among City analysts that Petrofac’s entry into the subsea market, far from being a liability, could actually be highly lucrative for the company, if it targets the Asian market, which lacks any real competitors.

So all in all, with Petrofac still very much in growth mode, the company’s low valuation seems unwarranted.

Specifically, Petrofac shares are currently trading at a historic P/E of 11, meanwhile sector peers Amec, Kentz and John Wood Group, trade at historic P/Es of 12.2, 15 and 15 respectively.