LONDON -- Recent stock market gains have seen the average P/E of FTSE 100 companies reach 15.4. The price-to-earnings ratio is a useful way to gauge the approximate value of a company, and while 15.4 isn't boom territory, it certainly isn't cheap either.
I recently looked at the five shares with the lowest P/Es in the FTSE 100 to see what was on offer. Do they represent hidden value, or are they cheap for a reason?
1. Resolution: P/E 4.2
Resolution (LSE: RSL.L ) is an investment vehicle whose current business is life insurance. It purchased Friends Provident in 2009 and followed this with the acquisition of AXA's UK Life business during 2010.
Resolution's plan is to merge and reform these businesses to the point where it can achieve a profitable exit, probably through a sale or flotation. If successful, this should generate considerable profits for Resolution's shareholders, but the company has recently extended its target exit date from 2012 to 2014.
In common with other big U.K. insurers, Resolution's share price has been in the doldrums for some time, and the firm didn't inspire confidence when it canceled a planned 250 million-pound return of capital to shareholders in July, saying the handout would be too risky in the current economic environment.
Resolution's 9.3% yield looks too good to be true, although the company has said it will maintain its current dividend policy. A progress update is due on Aug. 15, when Resolution publishes its interim results.
2. Kazakhmys: P/E 4.3
Next up is Kazakhmys (LSE: KAZ.L ) , Kazakhstan's largest copper producer. Kazakhmys is relatively unusual in that it is a fully integrated producer -- it mines, refines and sells its own copper. It also produces gold, silver and zinc.
Kazakhmys' low P/E rating is partly a reflection of the current weakness in mining shares, which have all fallen this year thanks to fears of weakening demand in China and the associated hit to commodity prices.
Yet Kazakhmys is a fairly low-cost copper producer and is quite robustly profitable, even with lower copper prices. The miner is expected to deliver pre-tax profits of 747 million pounds on revenues of 2.2 billion pounds this year and is on course to increase its copper production by more than 65% over the next six years, increasing its annual output from 300,000 to 500,000 tonnes.
Miners are not known for their generous dividend policies but Kazakhmys isn't too bad in this respect, with a current yield of 2.4%.
3. Eurasian Natural Resources: P/E 4.4
Eurasian Natural Resources (LSE: ENRC.L ) is another Kazakh natural-resources group that makes most of its money from mining -- mostly ferrochrome, iron ore and alumina.
Like a number of other Russian and Central Asian businesses that have joined the FTSE 100 in recent years, ENRC has a very small "free float." Five major Kazakh shareholders control 73% of the shares, including an 11% stake held by the Kazakh government and a 26% stake held by fellow FTSE 100 member Kazakhmys.
Corporate governance concerns have made ENRC relatively unattractive to U.K. investors, and although it has now appointed more independent directors as part of a corporate governance review, I am still not keen.
4. BP: P/E 5.2
We now come to the first of the traditional British blue-chip shares in our low P/E trawl. BP (LSE: BP.L ) suffered a dramatic reversal of fortunes in 2010 when its Macondo well blew out in the Gulf of Mexico.
Since then, the oil giant has been repairing the damage -- a process that has not been helped by its profitable but troubled Russian joint venture, TNK-BP, from which it is currently trying to extricate itself.
Despite its troubles, BP remains one of the few companies in the world capable of taking on the large, complex projects necessary to develop major new supplies of oil and gas.
Over time, I expect BP to recover from its current problems and to close the current valuation discount to its U.K. peer Royal Dutch Shell. BP currently offers an attractive 4.1% yield and while a falling oil price would hurt its profitability, the shares look good for a long-term investment.
5. Rio Tinto: P/E 6.1
Global mining giant Rio Tinto (LSE: RIO.L ) is a completely different proposition to the somewhat controversial Kazakh miners I looked at above. Rio has a market cap of 44 billion pounds and boasts operations all over the world.
Rio makes most of its money from iron ore, but also produces significant amounts of copper, aluminium and coal. To illustrate the scale of its operations, profits from iron ore totaled $4.7 billion in the first half of this year.
Rio's lowly P/E rating is fairly typical of the mining industry, which is currently adjusting to China's slowing growth. Rio looks excellent value to me and is a share I plan to buy next time I top up my ISA.
What would Buffett buy?
Billionaire investor Warren Buffett is known for his ability to seek out hidden value, invest against the trend and make massive profits. Of the five companies above, I believe that both BP and Rio Tinto might hold some attractions for him, if he was to make one of his rare non-U.S. investments.
Buffett doesn't often invest outside his home turf, but he did recently invest $1 billion in a major UK blue-chip share -- a big brand we all know, and that's currently out of favor with the markets.
Buffett was so keen on this share that he now owns more than 5% of the company -- and if you would like to find out the identity of the company and the price Buffett paid, then I would strongly recommend you download this free Motley Fool report, "One UK Share That Warren Buffett Loves".
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