BP shares were marginally weaker on Tuesday after the oil majors announced Q1 profits materially below the same period a year ago.

Oil and gas majors operate in a highly cyclical industry, which was demonstrated today in the BP earnings update. The company experienced a huge increase in earnings after Russia invaded Ukraine as oil prices soared. With the war now in its third year, oil prices have adjusted to the downside, and BP’s earnings have followed suit.

The big highlight for investors was the fresh buyback, which offset some of the disappointment around lower earnings.  

“BP’s proving it can splash the cash to shareholders even in a lower pricing environment. Underlying profit is down across all divisions but the first half buy back target of $3.5bn remains, with a $1.75bn tranche announced today,” said Derren Nathan, head of equity research, Hargreaves Lansdown.

The replacement cost profit of $1.6bn in Q1 2024 was higher than in Q4 2023 but a major downgrade from the $8.7bn generated in Q1 2023.

In the past, share buybacks have been enough to inspire a rally in companies amid lacklustre earnings. This was not the case for BP on Tuesday, and shares were down 0.4% at the time of writing.

Investors will note the company’s defensive undertones with a plan to save $2bn annually by the end of 2026. This clearly isn’t a company expecting a huge level of top-line growth over that period. 

The underlying price of oil and gas is undoubtedly the biggest driver of BP’s earnings. That said, investors may be encouraged to see that despite BP being an established operator, new assets coming online can help increase production and can have an impact on earnings. The world’s view of fossil fuel exploration is softening with the realisation oil and gas will play an important part in the energy transition and investors will look forward to updates on BP exploration programme and possible additions to BP’s production in the years to come.

“Commodity prices are out of BP’s control but where it can make a difference it is,” Nathan said.

“There’s a new plan to deliver cost savings of at least $2bn by the end of 2026 and some of the effects of lower prices have been offset by increased production. Theres new production on stream in the Caspian Sea as well as onshore United States in the Permian basin. There’s also development activity in the North Sea and exploration in Africa.”

Many investors will invest in BP for its dividend. Despite lower earnings, there’s nothing to suggest this dividend is under threat. 

To get ‘the best bang for your buck’ must be the most important need for companies marketing themselves across the globe. 

And that is just where Ebiquity (LON:EBQ) comes in. 

Over 70 of the world’s top 100 advertisers select the group as their trusted independent media adviser. 

This morning the £56m capitalised company reported its final results for the year to the end of December 2023, showing a 23.4% profit increase on the back of a just 6.8% better turnover. 

The figures and current year outlook should be good enough for investors to realise how under-rated its shares are at the current 41p. 

The Business 

The group provides media consultancy and investment analysis services in the UK, Ireland, North America, Continental Europe, and the Asia Pacific.  

It offers analysis and advisory services in the areas of media management, media performance, marketing effectiveness, technology advisory, and contract compliance services. 

Its set of technologies harness the power of data to provide independent, fact-based advice, enabling brand owners to perfect media investment decisions and improve business outcomes.  

The company is a data-driven solutions company helping brand owners drive efficiency and effectiveness from their media spend, eliminating wastage and creating value. 

Final Results 

For the 2023-year group revenue is reported to have grown by 6.8% to £80.2m (£75.1m), while adjusted EBIT improved by an impressive 31% to £12.0m (£9.2m). 

The group’s adjusted pre-tax profit was 23.4% better at £9.7m (£7.9m), while earnings were up 21.1% at 9.7p (7.9p) per share. 

CEO Nick Waters stated that: 

“We delivered a solid performance in 2023, expanding relationships with clients, progressing our business transformation programme and continuing to build scale in the US, the world’s largest advertising market. 

Despite the more challenging market conditions the business has shown great resilience, increasing revenue and delivering a strong operating margin performance at 15.0%, an improvement of 2.8 percentage points from 12.2% in 2022.  

This reflects the operating efficiencies we have achieved so far as part of our transformation programme and cost management, as well as continuing growth in our higher margin Digital Media Solutions business.” 

Current Year Outlook 

2024 will be an important year for the group’s transformation, as it continues to enhance its use of technology, while changing its operating model and improving its ways of working.   

These measures will help to further improve the group’s client service, to ensure greater efficiency and increase its medium and long-term profitability, giving its management confidence to expect further profitable progress in 2024. 

Broker’s View – 71p Price Objective 

Analyst Caspar Erskine at Liberum Capital has rated the group’s shares as a Buy, having set a Price Objective of 71p per share. 

His estimates for the 2024 results could see £85m revenues, £11.5m profits and 6.2p earnings. 

For 2025 he has already pencilled in £89m turnover, £14.0m profits and 7.6p earnings per share. 

A consensus of three brokers following the company suggests that the average Price Objective is 92p per share. 

My View – At Least 50% Upside 

It was only two years ago that this group’s shares were trading at 71.50p. 

By early February this year they had eased back to 31p, since when they have recovered to the current 41p level. 

Considering the profits being predicted by brokers over the next couple of years as the group adheres to its strategic growth, its equity is massively undervalued at just £56m, especially when one realises that it could be producing profits of £14.0m by the end of next year. 

I would estimate that the shares of Ebiquity could well rise 50% in due course and still look attractively priced. 

The FTSE 100 surged to fresh all-time record highs on Friday as a goldilocks Non-Farm Payrolls report helped propel stocks higher.

The US jobs report for April couldn’t have been much better for equities. After a series of higher-than-expected reports in March and February, the number of jobs added in April missed expectations helping fuel the narrative of rate hikes later in 2024.

The US added 175,000 jobs in April, substantially below the 241,000 expected – the biggest miss since 2021.

April Payrolls Unexpectedly Plunge, Biggest Miss Since 2021 As Unemployment Rate Rises https://t.co/iZqrWZAMgK

— zerohedge (@zerohedge) May 3, 2024

The unemployment rate unexpectedly rose to 3.9%, and average earnings rose less than expected. The scale of the softer data paints a picture of a US economy that isn’t as strong as previously thought.

“America’s overheated employment market is finally cooling down. The US added 175,000 jobs in April, well below expectations of around 241,000. Non-farm payrolls is a key data series for the Federal Reserve in its decision making process about the direction of interest rates,” said Garry White, Chief Investment Commentator at Charles Stanley.

“A weaker jobs market dampens wage pressures and makes some employees consider reining in their spending as they are concerned about future income. This is the sort of slowdown the central bank needs if it is going hit its 2% inflation target.”

While this is bad news for ‘main street’ in the US, it’s fantastic news for equity bulls.

A softer jobs market is exactly what the Federal Reserve wants to see before cutting rates. Consistently strong jobs reports have meant the threat of inflation heating up again has been too great, so a Non Farm payroll miss will feed into the narrative that the US economy is slowing, warranting a reduction in borrowing costs.

Stocks surged higher on the news with US indices leading the charge. The developments were not lost on UK stocks and the FTSE 100 spiked higher to touch an all-time intraday record high at 8,240.

The FTSE 100’s gains were broad with 88 of the 100 constituents trading higher at the time of writing.

Ocado was the top riser, with a gain of over 4%. Ocado trades more like a US tech stock than a UK food retailer, and the hint of lower borrowing costs fired up the food distribution and technology company. The shareholders recently reported to be pressuring the company to switch its listing to the US will not be perturbed by today’s move, but the reaction shows where Ocado shares could go when rates are eventually cut.

Rightmove was among the gainers, as were housebuilders Persimmon, Barratt Developments, and Taylor Wimpey. Any signal the Federal Reserve could cut interest rates will be welcome news for the UK housing market because the Bank of England will be very close behind the Fed in cutting rates – if they do not do so beforehand.

BAE Systems shares have several trends going in their favour. Some are fundamental, and some are related to technical analysis of the BAE share price.

The company has been one of the best-performing FTSE 100 stocks since the beginning of 2024. With a gain of 21% since the turn of the year, BAE Systems is in the top ten performers.

Two distinct trends support shares. First, underlying geopolitical trends are helping support earnings. Second, the stock is in a firm uptrend, and technical analysis suggests the BAE Systems share price has more to run.

BAE Systems was one of Hargreaves Lansdown’s most traded shares over the past week. And for good reason.

From a fundamental standpoint, BAE Systems is experiencing high structural demand for its defensive products. The tragic conflicts unfolding worldwide are driving increased defence spending by developed market governments.

BAE Systems group sales grew 9% in 2023 to £25.3bn from £23.3bn in 2022.

The company is involved in the world’s largest defence project, the F-35 Lightning II fighter jet programme, which provides BAE a decade’s worth of order flow to deliver 3,000 aircraft. The Typhoon aircraft accounted for 36% of BAE Systems sales in 2023 as the company services the defensive requirements of countries including Qatar, Germany and Spain.

Underscoring future demand from these countries, Qatar’s defence budget grew 33% between 2021 and 2022 and is expected to expand defence spending at a 6% CAGR between 2025 and 2029. Germany is planning to increase defence spending to 2% of GDP.

In addition to Typhoon jets, Germany has recently placed an order for 227 BvS10s tracked vehicles, one of BAE Systems’ strategic orders for 2023.

The US has the world’s biggest defence budget and is naturally BAE System’s largest customer, accounting for 42% of BAE’s sales in 2023. BAE Systems has multiple long-term projects with the US, spanning munitions, aircraft and defence systems.

Spending across major customers is expected to remain elevated, supporting sales growth in the years ahead. The group is doing an excellent job of converting higher sales into higher margins, which increased to 10.6% in 2023. Margin expansion at BAE Systems’ scale is hard to come by, so this must be applauded.

BAE Systems Valuation

BAE Systems sales and profit growth have driven the share price higher, but not to levels that could make the stock look overvalued. Trading at 19x forward earnings, BAE shares are reasonably valued. They aren’t undervalued by any stretch of the imagination, yet future sales growth supports the current valuation.

Technical attractions

BAE Systems shares have been in a solid uptrend since the lows of 2020, providing investors with spectacular returns. The trend remains intact, and BAE Systems shares have passed a number of tests of this trend in recent months.

The 50-day moving average is providing consistent and robust support. The trend was tested numerous times in early April, and the stock rebounded to trade close to recent highs.

A word of caution. The stock has failed in the 1,360p-1,380p region on a number of occasions and a level of resistance is starting to form. If broken, the stock will be in blue sky territory.

Investors are buying into any dips, and the BAE Systems share price has made a series of higher lows in recent weeks. This supports the ongoing uptrend.