Ithaca Energy's (LSE: IAE) share price has stormed over 10% higher today after it received a bid approach from Dalek Group. The offer is made entirely of cash and works out as 120p per share, which means that investors buying the company a year ago will now be sitting on gains of around 450%. While impressive, could Ithaca's share price move any higher? Or is it a stock to either avoid or sell after today's news?
A done deal?
The offer price represents a 12% premium to the closing price of the company's shares on 3 February. It's also ahead of the average analyst consensus target price of around 99p, which indicates the offer is fair. In fact, the board has unanimously accepted the offer, which indicates that there's a relatively high chance it will go through. But their stake in the company is just 2.6%. So there's no guarantee that other shareholders will accept the offer.
Of course, when a bid is made for a company there's always a chance of other bids. While this may be the case for Ithaca Energy, it seems somewhat unlikely. A key reason for this is the company's valuation. Based on its forecasts for 2018 of earnings per share of 5.8p, the offer of 120p means the company is valued on a forward price-to-earnings (P/E) ratio of 20.7. While it has a relatively bright long-term future and could deliver rising profitability over the coming years, there are a number of resources companies that offer better value for money at the present time.
For example, BHP Billiton(LSE: BLT) trades on a P/E ratio using next year's earnings of just 15. That's a 25%-plus discount to Ithaca Energy, and yet BHP offers lower risk than its resources industry peer. For example, it has a far more diversified business from both a geographic and commodity perspective. In addition, it has a stronger balance sheet, superior cash flow and a better chance of surviving a prolonged downturn in the prices of commodities, which can't be ruled out.
The resources sector clearly trades on valuations that may tempt bid approaches such as the one received today by Ithaca. So there may be other opportunities to benefit from rapid rises in share prices elsewhere within the sector. Buying Ithaca now could prove to be a questionable move though, since the chances of an improved offer being made seem unlikely on valuation grounds.
Although BHP may be too large to become a bid target, its relatively low-risk business model and enticing valuation could allow it to record rapid share price growth. Certainly, its capital gain potential seems to beat that of Ithaca. As such, for investors in Ithaca, 120p per share may be worth taking, and potential buyers may be best looking elsewhere.
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Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.