The FTSE 100 index (INDEXFTSE: UKX) has delivered a disappointing return since the start of the year. It is currently down by around 3%, with rising interest rates, high inflation and an uncertain global economic outlook weighing on its performance.
However, a number of its members have produced year-to-date share price gains. For example, energy major BP (LON: BP) has risen by 12% due in part to a buoyant oil price. Meanwhile, distribution specialist, Bunzl (LON: BNZL), is up 4% since the turn of the year due to the positive impact of high inflation on its financial performance.
With buoyant long-term prospects and sound finances, both companies could offer further share price growth that allows them to continue their outperformance of the FTSE 100 index.
Despite its recent rise, BP’s share price continues to trade on a relatively low valuation. Indeed, it has a forward price-to-earnings ratio of 4. This suggests that investors are downbeat about the firm’s prospects in what remains a highly uncertain period for the world economy.
Certainly, the oil price has fallen heavily over recent weeks. After reaching a high of around $122 in early June, it has fallen to roughly $95. While a further decline cannot be ruled out, the oil price is still higher than the average realised price of $84 that was recorded during the firm’s first quarter. In that period, it generated a 54% rise in underlying profit versus the previous quarter. As a result, current prices could allow the business to produce favourable financial performance.
A relatively high oil price gives BP the flexibility to improve its financial position, return cash to shareholders and invest in its long-term future. Its transition away from fossil fuels is likely to be lengthy, but could produce a sustainable growth profile that leads to a more generous market valuation.
In the short run, share price volatility is likely to remain high. Rising interest rates are set to slow the world’s economic growth rate, which could be bad news for commodity prices. But with a wide margin of safety, BP’s shares appear to price in an uncertain future. As such, they represent good value for money.
Bunzl’s shares have been relatively popular this year because it has the capacity to pass higher prices on to its customers. Indeed, its latest trading update showed that revenue increased by 12-13% and was catalysed by a rising price level, with inflation reaching a 40-year high. Encouragingly, its operating margins were higher than historical levels during the half-year period.
Although rising interest rates and falling commodity prices may lead to a more subdued rate of inflation, Bunzl’s share price and financial outlook could be boosted by acquisitions. Its financial standing suggests further M&A activity is likely to be ahead. Its net gearing ratio of 82% and net interest cover of 11 indicate additional leverage can be withstood without placing its financial position under strain.
Clearly, the company’s recent share price gain means it now offers a narrower margin of safety than it did previously. Its forward price-to-earnings ratio of 18 suggests investors have high expectations about its future performance. But with double-digit growth, a sound strategy and inflation-beating credentials, it could continue to outperform the FTSE 100 index.