Oilmajor BP(LSE: BP) reported a decent set of quarterly results on Tuesday when it confirmed its dividend policy, and its stock bucked the trend of a declining market.Althoughnot unexpected, its rally has been truly impressive in recent weeks, and has not been too different from that ofGlaxoSmithKline(LSE: GSK) andARM (LSE: ARM) but is BP as overvalued as Glaxo and ARM seem to be?
BPs Rally Is Not Over
BPs share pricehas risen 27% since the multi-year low it recorded in mid-December, and is up 16% this year thats a lot for a cyclical business operating in an environment where average oil prices are about 50% lower than in the same period one year earlier.
Between December 2013 and May 2014, BP traded in the 473p508p range, and itcurrently trades at the low-end of that range. Its valuation is in line with the average price target from brokers, but analysts such as those at Goldman Sachs have become increasingly bullish.
BPs balance sheet, profit and loss, and cash flow statements all point to a solid company one that promises sustainable, market-beating dividends, and which has shown it can adapt swiftly to fast-changing macroeconomic conditions.
As part of its divestment programme, it still has a few billions of assets to sell, which supports the investment case. I do not believe in a takeover of the group, and I dont think the shares price in a takeover premium. Based on fundamentals, its trading multiples point to a 25% upside from this level into 2016.
And thats also the kind of rally you should expect from Glaxo, if its managers get their priorities right.
GlaxoSmithKline Must Deliver To Deserve A Premium
Just like BP, Glaxo has surged from its lows in December, to record a 24% gainto10 April,but it has lost nine percentage points since about 1 a share.
Glaxo is up 12% this year and trades in line with market consensus estimates. While more upside into the end of 2015 is possible, itsmuch more expensive than BP, based on trading multiples for 2016 and 2017.
Of course, Glaxo is more defensive than BP, but while BPs earnings cycle may have bottomed out, several risks still weigh on Glaxo, spanning China and large divestments. Quarterly results are due on 6 May and may provide a fillip to the stock, but long-term value hinges on thespin-out of itsHIV drugs business.
ARM Is Not Expensive
If you had followed my suggestionone year ago, youd have recorded a 37.5% performance over the period,excluding dividends.
Recent results showed a terrific growth rate and a decent level of profitability, both of which are more relevant than ARMs own valuation (40x forward earnings) when it comes to assessing the investment case.
The chip designer is not as vertically integrated as Intel, and thats where its strength resides. Trading multiples point to downside, some pundits argue, but if ARM maintains its projected growth rate, the stock could easily hit 1,650pby May 2016.
At 1,164p, ARM currently trades around its record highs and is up 17% this year.
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