I. Investment Highlights Company Profile



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Systematic Risk
The beta of BP is 0.50 and does not cause much threat. (MSN money)
IX. Fundamental Valuation
Estimation of the required rate of return

CAPM = Re = Rf + Beta(Rm-Rf)

To calculate the required rate of return then we will just use the CAPM model. This return is estimated from a period of data lasting over a 9 year period (1995-2004),which was done by using historical data on the S&P 500. The S&P 500 is what I used for my proxy in this calculation. The equity risk premium calculated on the market was 6.38%.
Re = 4.3 + .5(6.38)
Requity = 7.49% is the required rate of return
Estimating the growth rate
Growth rate = g = (1-p) x ROE

Stock Price $65.50 as of 11/14/2005

Market Cap. 229,437.6 (million)

Beta 0.50

EPS 4.25

DPS 1.71


P/E 12.2

Dividend Yeild 3.3%

Dividend Payout Ratio 40%

Required Rate of Return 7.49%

ROE 24.4%

Forecasted growth rate 6.05%


Forecasted Growth Rate

G= (1-p)*ROE = (1- .40) * 24.4 = 14.64%


P/E Valuation of BP
V = P/E x EPS
According to advfn.com numbers:

P/E = 12.2

EPS = 4.25
V = 12.2 x 4.25 = $ 51.85
According to MSN money:

P/E = 12.2

EPS = 5.30
V = 12.2 x 5.30 = $64.66
Using MSN money’s calculations for EPS, the value is within a dollar from what the stock closed on Monday November 14, 2005. According to this estimate it would suggest that the stock is overvalued as of right now, but not by much. Of the two estimations that I used, I feel as if the Price to Earnings multiplied by Earnings per share seems to be the one that would fit and work well within the current value of the stock.
Valuation Using Constant Growth Model
Formula: {D x (1 + g)} / (k-g)


  • Valuation of the stock correctly will depend on my growth rate that I decided to use as well as the estimated required rate of return.

V= {1.71 x (1 + .1464)} / (.0749 - .1464)


V= $ - 27.42


  • Obviously this value is wrong and will be emitted from our consideration.



X. Other Considerations
From MSN money software they rate the stock. BP plc (ADR), a large-cap value company in the energy sector, is expected to match the market over the next six months with very low risk. They rated it a 6. In the short term, the next 1-2 months, StockScouter forecasts that value stocks will be neutral, large-cap stocks will be in favor, and energy stocks will be in favor.

Mean Recommendation Conversion Table

1.0 =

Strong Buy

1.1 thru 2.0 =

Moderate Buy

2.1 thru 3.0 =

Hold

3.1 thru 4.0 =

Moderate Sell

4.1 thru 5.0 =

Strong Sell

MSN money ratings are pulled from.




Analyst Ratings

Recommendations

Current

1 Month Ago

2 Months Ago

3 Months Ago

Strong Buy

13

12

9

9

Moderate Buy

2

2

2

2

Hold

4

4

5

5

Moderate Sell

0

0

0

0

Strong Sell

0

0

0

0

Mean Rec.

1.60

1.63

1.89

1.89

Many analysts consider BP a moderate buy.


XI. Conclusions


  1. I believe that we should definitely buy this stock.

  2. Many analysts agree that this stock may stay neutral for a while but, in the long run large cap companies will have the advantage and especially in the energy sector.

  3. BP has outperformed the market consistently over the past 5 years. The demand for petroleum products is so high right now and the supply is limited, BP will continue to grow. They are the industry leader in many different areas and are committed to maximizing shareholder value while being socially and environmentally safe.

  4. The price point that it is at now is between it’s 52 week range and seems to be climbing up. Forecasts for oil in 2006 are reportedly suppose to be 2% higher than they were in 2005.

  5. Though gas prices are falling it does not mean that their stock is going to fall.


PROS

    • The price to earnings multiple is lower than average for all stocks in the StockScouter universe. (Positive analysts say)




    • Earnings growth in the past year is holding steady compared to earnings growth in the past three years. (Neutral analysts say)




    • Strong leadership within their company since the merger with Amoco







    • After restructuring their Solar Power division in 2003, in 2004 they made their first profits.




    • They are the leaders in research and technology and have made impacts with their carbon free liquefied natural gas which America, Africa, Mexico and the UK have all signed agreements on.




    • They have not outstanding claims against them in court.


Con

  • The most recent quarterly earnings report was slightly lower than analysts’ consensus forecast. Neutral/Negative



  • One or more analysts has modestly decreased quarterly earnings estimates for BP. Negative



  • The uncertainties of tragedies like Hurricanes Katrina and Rita can cause significant damages to refineries they produce out of.



  • The global climate warming trend has had a negative effect on the petroleum business.



  • Prices might fall after Wednesday’s announcement from the US Department of Energy on fuel reserves.



  • The energy sector is highly correlated to the market in movements, so as long as the market doesn’t slide into a recession then businesses will prosper and the demand for petroleum products will be there.







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