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With yesterday's sell-off of BP shares taking the stock about 10% lower, the shares are now trading at a price not seen this century. The suspension of the dividend, of course, makes the stock unattractive to income investors, but beyond that, there are more than enough people around who are primarily interested in punishing the company. After all, BP has become the boogeyman of the day, an easy target for activists and comedians alike.
But investors need to take a more logical approach, as well as a long-term view. Obviously, this won't be an income stock for some time. But when you consider its earnings potential in the decades ahead, it's clear that the restoration of the dividend, albeit at a lower level, won't be too many years away. And like ExxonMobil (XOM) after the Exxon Valdez incident, the company (and the stock) will eventually rebound.
The current market capitalization is just under $90 million, down about 50%. So it has taken a $90 billion haircut, placed $20 billion in escrow, suspended its $10 billion per year dividend, and may well have to cut back on its annual capital spending of $30 billion. Add to that the crude oil that it's losing on a minute-by-minute basis, and it's clear that the company will be hurting for some time. Hasn't it suffered enough?
The popular image of Tony Hayward as an uncaring playboy yachtsman is a focal point for many critics, but the fact is that the company employs tens of thousands of people both here and abroad, and the chances are pretty good that they care very deeply about what's happening. We shouldn't punish them for the poor people skills of Mr. Hayward nor for the oil spill in general, since it was, after all, an accident.
A Sleeper Investment?
So what about BP stock now? Is it a buy? That's the question some are asking, but the real question should be: When is it a buy? Eventually, when the flow of oil is stopped and the claims are paid off, BP's profitable business model will kick in and the stock will become attractive again. That could be years away, especially when you factor in all the court cases we're likely to see. But like Exxon after the incident in Alaska, the company will likely fare much better than many assume. If we wait for that to become clear, it will be too late.
My guess...and that's all that it is...is that buying the stock now that it's below $30 will prove to have been a wise decision in retrospect. We'll have to be patient, but that's the way it is with sleeper stocks. (You definitely could label BP a speculative buy, of course. I would not be surprised if the company chooses to give Mr. Hayward his walking papers, nor would it surprise me if that event triggered a nice little rally. Then he can play with his yacht all he wants.
Disclosure: No position at this time
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