BArron's : BP Offers 33% Upside as 'the Worst Is Over'

BP Offers 33% Upside as 'the Worst Is Over' {BP/ LN Equity GIP <GO>}

The 2010 Gulf oil spill exacted a heavy toll, but the worst looks to be over. Why the stock, which yields 4.8%, looks very undervalued.

BP is back.

With a ban on new U.S. government contracts lifted, the energy giant on Wednesday won drilling leases in the Gulf of Mexico, where in April 2010 one of its wells exploded, killing 11 people in the worst offshore oil disaster in U.S. history. BP (ticker: BP) won 24 of the 31 auction blocks it bid on for $41.6 million.

Since the spill, BP has sold assets worth near $40 billion and plans to sell $10 billion in underperforming assets over the next two years. That should help management slash debt, repurchase shares, and streamline its business, resulting in a higher dividend and stock price. Shares yield 4.8%.

"The worst is over," says Lorne Steinberg, a Montreal money manager who has been buying the stock. "The bulk of liabilities have been paid for, or are accounted for … BP has plenty of room to raise the dividend, and with share repurchases, if the stock price doesn't go up, it will yield 6% in two years. That is reason enough to own it."

BP is a behemoth in offshore drilling globally, producing about 3.2 million barrels of oil equivalent per day globally, with about 20% of its production in the U.S. and 30% in Russia. It also has a refining business.

BP recently said it would form a separate business to operate U.S. onshore exploration and production. The move highlights its cash-flow strength in shale plays and creates a more competitive operation. That should help boost BP's discounted valuation relative to other large, integrated energy companies.

This year, BP is expected to generate 15% per-share profit growth, and cash flow of nearly $10 per share on revenue of $350 billion, despite lower-capital spending and spill liabilities.

While BP stock has roughly doubled from its June 2010 low following the blowout, it's still down more than 20% from the initial disaster, while competitors ExxonMobil (XOM) and Chevron (CVX) are each up about 40%.

And BP trades at a discount to peers. Exxon trades at more than 12 times forward earnings, and Royal Dutch Shell (RDSA) at more than 10 times, while BP's multiple is 9.5 times estimated 2014 earnings of $4.92 per share. It can eventually mend that gap.

Steinberg thinks BP management is being overly conservative with profit forecasts to woo Wall Street with upside surprises. He sees shares rising 33%, to $62, in 12 months. Oppenheimer analyst Fadel Gheit has a target price of $60.

Looming large is BP's remaining spill liability. The company has about $9 billion remaining of $43 billion set aside for spill damages. As lawsuits continue to wind their way through the courts, BP's liability may be higher than expected. But the resolution of the amount, even if higher, will provide clarity that can boost shares, says Gheit.

Another overhang: BP's significant exposure in Russia. Last year, BP swapped a 50% stake in TNK-BP for a 19.75% stake in Russia's state-owned energy giant Rosneft, worth about $13.5 billion. Rosneft provided BP with $456 million in distributions for the first nine months last year. BP can be hurt two ways: Sanctions against Russia over the annexation of Crimea in Ukraine could reduce the value of BP's interest, hurting the balance sheet and leverage ratios, says Phil Adams, a credit analyst at Gimme Credit. More important, sanctions could cut off perhaps $600 million in cash dividends coming to BP.

"In the context of 2014's estimated $30-$31 billion of cash from operations, this would not be a huge body blow, but it is not an insignificant amount," Adams tells Barrons.com.

So far, sanctions don't have much muscle. Europe needs Russian gas, and Western energy companies have much at stake in Russia.

However, if oil prices sink, BP shares will likely fall as the company collects less money for its barrels. Better refining margins won't make up the difference.

But because BP shares appear undervalued and offer an enticing yield, they are likely to fare better than peers in a selloff. The largest integrated oil companies have underperformed the broader market over the past five years and BP has trailed its peers during that time. Now, we think BP will break from the pack.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: SYMC -9.6% (reaffirms guidance, appointed interim CEO effective immediately; downgraded at Jefferies, Baird, Cowen, UBS), INVE -9.3%, DLIA -8% (light volume), AIR -6.2%, TIF -3.5%, RALY -3.3%, NKE -3.6%, ENVI -2.6% (light volume), DRI -2.6%, TISI -1.7% (also announces impact of Q3 weather delays; revises earnings guidance and announces revaluation of Venezuelan operations), WTSL -0.6% (light volume; also entered into definitive agreement with a single institutional investor to issue $27 mln of convertible notes as well as warrants to purchase Class A common stock in a private placement).

Other news: ISR -6.1% (modestly pulling back), ENLK -5.7% (prices public offering of 17,997,296 common units representing limited partner interests owned by GSO Crosstex and certain of its affiliates for total gross proceeds of ~ $550 mln), PBF -5.7% (prices secondary offering of 15 mln shares of its Class A common stock by funds affiliated with First Reserve Management for total gross proceeds of ~ $382.5 mln), BGMD -4.7% (still checking), BLDP -3.7% (still checking), WMC -3.2% ( declares first quarter dividend of $0.67 per share; announces estimated book value per share, as of Feb 28, 2014, was ~ $15.18), SONS -2.1% ( announces offering of common stock by selling stockholder and concurrent share repurchase), SGMO -1.7% (priced public offering of common stock consisting of 4,444,444 shares at $22.50 per share), HLF -1.2% ( Carl Icahn considering adding to HLF Board, but not to his stake, according to reports ; downgraded to Hold from Buy at Argus), ZION -0.7% (only bank that did not clear fed hurdle for capital and leverage), UA -0.7% (following NKE results), FMI -0.3% (files for $150 mln offering of common stock), BCS -0.3% ( has missed chance to participate in Alibaba IPO, according to reports).

Analyst comments: EQY -100% ( downgraded to Hold at MLV & Co; tgt lowered to $23), AMRI -3% (downgraded to Underperform from Neutral at Sterne Agee), CHL -2.6% (downgraded to Neutral from Overweight at HSBC Securities ), RBS -1.4% (downgraded to Equal Weight from Overweight at Barclays), CAG -1% ( downgraded to Neutral from Buy at Goldman), BA -1% (downgraded to Neutral from Buy at Goldman)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: DEJ +22.9%, COMM +14.3%, TIBX +1.9%, SLW +1%, WLP +0.3%, .

M&A news: LIN +21.9% (Media General and LIN Media to combine; LIN Media shareholders to receive aggregate consideration of $763 million in cash and 49.5 million shares in stock, calc to ~$27.82 per LIN share)... Peers trading higher: GTN +9.7% CETV +4.5%, NXST +3.1%

Select financial related names showing strength boosted by stress test results: SAN +0.9%, MS +0.8%, DB +0.5% (still facing 4 lawsuits over bad mortgages, according to reports), wfc +0.6%, gs +0.5%, DFS +0.3% (proposes an increase in quarterly dividend to $0.24 per share from $0.20 per share and share repurchases of up to $1.6 bln during the four quarters ending March 31, 2015 ), .

Metals/mining stocks trading higher: MUX +4.9%, IAG +4%, SWC +3.1%, KGC +2.1%, MT +1.9%, BBL +1.7%, BHP +1.6%, RIO +1.5%, GLD +0.9%, SLV +0.9%, GOLD +0.8%.

European drug names trading higher: MRK +2.9%, SNY +1.9% (Genzyme's Lemtrada Approved in Brazil for Treatment of Multiple Sclerosis), NVS +1.5% (UK recommended Bexsero vaccine for inclusion in National Immunisation Programme to help protect against devastating meningitis B ), AZN +0.2%

Other news: UPIP +84.6% (Unwired Plant and Lenovo announce $100 mln patent license and patent purchase transaction), GNK +33.9% (makes $3.1 mln payment on interest payment originally due Feb 18), AVEO +13.8% (regains worldwide rights to AV-203: Agreement with Biogen Idec (BIIB) allows AVEO to seek partner to accelerate clinical development), KIOR +8.4% (disclosed it issued Lenders ATM Warrants to purchase 3,032,406 shares of Class A common stock for exercise price of $1.37 on March 18), ANN +7.7% (Golden Gate Capital discloses 9.5% stake; ANN comments that it welcomes new investors), ASTM +4.6% (continued strength), AKS +3% (announces price increase for hot roll carbon steel to $660 per ton, effective immediately with new orders),YELP +2.5% (Yelp and YP sign strategic deal), ABMD +2.3% (announced that the Centers for Medicare & Medicaid Services has released an updated version of ICD-10 MS-DRGs and maintained assignment to Diagnosis Related Groups 216-221 for the category of devices that includes Impella pumps), JKS +2.2% (still checking), DEG +2.1% (still checking), TXMD +1.9% (prices secondary offering of 9 mln shares at $7.10 per share), ORAN +1.8% (still checking), JDSU +1.7% (still checking), BWLD +1.5% (following positive MadMoney mention), FEYE +1.5% (modestly rebounding), AGO +1.4% (WL Ross & Co and affiliates sell 4 mln common shares), SI +1.4% and ASML +1.3% (still checking), EGLE +1.1% ( announces entry into waiver and forbearance agreement), DRYS+0.9% (following GNK news), CMGE +0.9% ( priced follow-on public offering of 3,442,000 American depositary shares at $24.00 per ADS), SBUX +0.7% (expanding alcohol sales, according to reports; Barron's profiles positive view on Starbucks), AMZN +0.5% (has closed China third party store following reports of fake cosmetic sales, according to reports), KBH +0.5% (priced aggregate of 6,944,445 shares of its common stock at $18.00 per share and upsized $400.0 mln in aggregate principal amount of its senior notes due 2019 ), DATA +0.2% (priced public offering of 4 mln shares of Class A common stock at $89.25 per share ).

Analyst comments: PRMW +3.5% (initiated with a Buy at B. Riley & Co.), KERX +3.3% (initiated with a Buy at Mizuho; tgt $25), ABMD +2.1% (ticking higher, upgraded to Buy from Neutral at BTIG Research), ELGX +1.9% (ticking higher, upgraded to Buy from Neutral at BTIG Research ), JDSU +1.7% (strength attributed to analyst upgrade), EXC +1.1% (upgraded to Outperform from Neutral at Credit Suisse), UTX +1.1% (upgraded to Buy from Neutral at Goldman; tgt raised to $138 from $123), CLGX +0.3% ( initiated with a Outperform at Oppenheimer), PGR +0.3% ( upgraded to Outperform from Mkt Perform at William Blair), PKX +0.3% (Posco upgraded to Buy from Neutral at Citigroup), AAPL +0.2% (initiated with an Outperform at Macquarie; tgt $630)

(Makor) Top Trading Ideas: LONG YAHOO / (SHORT SOFTBANK)

Top Trading Ideas: LONG YAHOO - the Alibaba call / (possible hedge with a short in Softbank)

We recommend going long again Yahoo on the upcoming Alibaba IPO. The market consensus for Alibaba's IPO value is around $150bn with some estimates going as high as $200bn. This IPO will undoubtably be the most successful IPO of the year, and certainly one of the best of all times. Yahoo owns 24% of Alibaba. We had made the case for Yahoo back in October 2012 when the shares were trading at around $16.00 and recommended to exit in May 2013 at around $26.00. Since then, the valuation of Alibaba has exploded further, resulting in a still negative Yahoo stub even on the most conservative estimates for Alibaba. Yahoo shares will most likely re-rate up to the IPO date. We calculate a discount to NAV of 33 to 45%, which is huge by US market standards. We note that the Alibaba stake will account for 100% of Yahoo's NAV in the case of a $150bn valuation. In other words, anyone wanting to subscribe to the Alibaba IPO will be "fully allocated" by just buying Yahoo. FULL REPORT ATTACHED

>>> US Early premarket gappers

Early premarket gappers

Gapping up: UPIP +84.6%, GNK +33.9%, DEJ +23.3%, COMM +14.3%, AVEO +13.8%, KIOR +8.4%, ANN +7.7%, ASTM +4.6%, YELP +2.5%, JKS +2.2%, DEG +2.1%, TXMD +1.9%, MT +1.9%, TIBX +1.9%, ORAN +1.8%, BBL +1.7%, JDSU +1.7%, WTSL +1.7%, BHP +1.6%, NVS +1.5%, RIO +1.5%, AGO +1.4%, SI +1.4%, ASML +1.3%, EGLE +1.1%, DRYS +0.9%, CMGE+0.9%, GLD +0.9%, SLV +0.9%, AGRO +0.9%, GOLD +0.8%, WLP +0.7%

Gapping down: SYMC -9.6%, INVE -9.3%, DLIA -8.8%, AIR -6.2%, ISR -6.1%, BGMD -4.7%, PBF -4.6%, BLDP -3.7%, ENLK -3.5%, WMC -3.2%, NKE -2.9%, ENVI -2.6%, SONS -2.1%, SGMO -1.7%, TISI -1.7%, ZION -0.7%, UA -0.7%,

WWD : Mulberry CEO Bruno Guillon Resigns

LONDON — Mulberry Group is poised to enter a new chapter as it hunts for a chief executive officer as well as a creative director, and observers insist it should turn back time and revive former strategies.

On Thursday, the company said that Bruno Guillon was stepping down as ceo with immediate effect after two tumultuous years.

Guillon’s tenure was marred by multiple profit warnings — the most recent of which was in January — the resignation of creative director Emma Hill, and the collapse of the company’s share price.

Mulberry shares, which are listed on the London Stock Exchange, have slumped by about 65 percent on an adjusted basis since Guillon arrived at the company. On Thursday, they closed up 5.5 percent to 6.72 pounds, or $11.16, following the news of his departure.

Mulberry is majority owned by Challice Ltd., a company controlled by Ong Beng Seng and Christina Ong. They own 56.2 percent, while the rest is listed on the AIM division of the LSE.

Godfrey Davis, currently the group’s non-executive chairman and previously its ceo, will become executive chairman until a successor for Guillon is found.

Guillon, formerly managing director of Hermès France, took up his role in March 2012, and during his tenure sought to take Mulberry upmarket with higher prices and to build it into an international name that could compete with the big luxury brands.

For nearly a year he was attempting to execute those strategies without a creative director. The brand has not yet named Hill’s successor, and last month canceled its fall catwalk show. Instead, during London Fashion Week, it hosted a presentation and party to launch a new bag designed by Cara Delevingne.

The company declined further comment about its future on Thursday, but industry sources said Mulberry needs to unravel Guillon’s work.

An industry source close to Mulberry said the company should try to convince Hill and Georgia Fendley, Mulberry’s former brand director, to return. “Get Emma and Georgia back, watch the brand rediscover its identity and let the stock price recover,” said the source, who asked not to be identified.

Hill’s last collection was for spring 2014, and she has been pursuing personal projects since leaving Mulberry last year. She spent six years at the brand, and sources said she left because of disagreements with management over creative and operational strategy. Fendley also left last year to focus on her branding and creative agency, Construct London.

Luca Solca, managing director of global luxury goods at Exane BNP Paribas, told WWD: “The problem at Mulberry has been an ill-conceived and badly executed attempt to drive the brand to a higher price point. The truth is that Mulberry was very successful in the accessible and aspirational price segment, but could never make it in the high end, as it was not credible from a content and heritage point of view. What Mulberry has learned from the experience is that it is not enough to hire a ceo from Hermès to change its brand DNA.”

Solca added that Mulberry should “go back to its roots and price where it is credible and desirable to consumers. Megabrands moving upmarket are creating a significant price umbrella and a very interesting opportunity for the likes of Mulberry to exploit; think Michael Kors, Kate Spade, Tory Burch and Longchamp. This is very much where Mulberry should play.”

In January, Mulberry said that sales for the year ending March 31 will likely be flat against last year’s 165 million pounds, or $273.6 million. It pinned the blame on lower-than-expected U.K. retail sales — a result of tough pre-Christmas trading conditions — and wholesale order cancellations from South Korea, which accounts for 20 percent of its wholesale business.