Today I’ll be discussing the outlook for oil supermajor BP, home improvement retailer Kingfisher, and aero-engine maker Rolls-Royce. Should you be risking your money on these FTSE 100-listed blue chips right now?
Heady valuation
Oil and gas producer BP (LSE: BP) has enjoyed a decent rally in recent weeks along with its great rival Royal Dutch Shell. But it’s not been for the usual reason, a rise in the price of oil. In fact the price of Brent Crude has remained broadly flat at around $50 a barrel for some time. The reason for BP’s recent strong performance is of course down to the UK’s decision to leave the European Union. The resulting weakness in our beloved currency could help boost BP’s profits, which are mostly earned overseas.
However, before you reach for your laptop or phone to purchase some shares, I would first consider BP’s current valuation, which to me looks a little toppy. The recent share price spike has left the company trading on 32 times forecast earnings for the current year and suggests to me that investors should perhaps wait for the next dip in the share price (and hence a more favourable entry point) before taking the plunge.
Low growth
Home improvement retailer Kingfisher (LSE: KGF) has no doubt been one of the casualties of Brexit with its shares plunging to 12-month lows following the vote on 23 June. So is this an opportunity for savvy investors to pick up a bargain while the market is still in panic mode? Unfortunately not, in my opinion. While there may be bargains out there with low valuations and shares oversold, I feel the owner of B&Q and Screwfix looks fully valued at current levels given the limited outlook for growth.
Our friends in the City are predicting earnings growth of just 4% for the current financial year to January 2017, and more of the same next year with only 5% growth predicted. This would leave the shares trading on a forward price-to-earnings ratio of 13 for FY2018, and on a par with historical levels. Furthermore, with prospective dividend yields no better than average for the FTSE 100 at around 3.5%, I don’t see Kingfisher as an obvious buy for either growth or income.
Rolls-Royce flying too high
In contrast to Kingfisher, engine-maker Rolls-Royce (LSE: RR) has enjoyed a Brexit boost as the market takes account of the positive impact a weaker currency would have on overseas earnings. The firm’s shares have climbed up above the £7 barrier following the UK’s decision to leave the EU and could fly even higher if the currency grows weaker still.
However, despite the currency boost, analysts believe the company will struggle to maintain its profitability this year, with consensus forecasts suggesting a massive 58% decline in earnings for 2016. The resulting price-to-earnings multiple of 30 suggests a pricey valuation, with a possible share price correction looming. I would stay away for the time being and wait for a significant improvement in the earnings outlook or a more favourable entry point.