Investment Column: BP shares sell-off is overdone so buy now

Talvivaara Mining; Tomkins

Our view: Buy

Share price: 567p (+2p)

Is BP going to go bankrupt? That is the question for investors and putative investors to answer. Certainly the immediate outlook is bad. The fatal explosion and subsequent sinking of the Deepwater Horizon rig in the Gulf of Mexico two weeks ago is an unmitigated disaster. Beyond the human cost of 11 lives, and beyond the environmental cost of thousands of square miles of sea contaminated, there is a massive financial and reputational cost to BP.

Financially, things are looking grim. Deepwater Horizon was not BP's rig and was not operated by BP staff. But it was drilling in BP's concession for BP's oil, so BP is responsible and has accepted full liability. No one yet knows what the total cost of the clean-up operation and related compensation will be, but analysts put the figure at anywhere up to $12bn (£8bn).

The bigger hit, of course, will be on BP's reputation. The company has historical problems in the US. It has only just escaped the taint of the Texas Oil Refinery explosion which killed 15 workers in 2005, thanks to tireless efforts of the current chief executive, Tony Hayward, who took over in 2007. Now, after Deepwater Horizon, there is even speculation about whether BP will be forced out of the US market altogether. All of this is bad news, and the firm's share price has slumped by 13 per cent since 20 April, the day before the explosion – but that makes an even stronger case to buy.

Mr Hayward has made fantastic progress since taking over, centralising management, improving BP's safety record and producing a series of sector-beating results. Add to that the world's ever-growing thirst for oil, and it looks unlikely that Deepwater Horizon will spell the end of BP altogether. In that case, this is without doubt the time to buy.

Talvivaara Mining

Our view: Hold

Share price: 356.2p (-39.8p)

It has been a tough few months for the Finnish nickel group Talvivaara Mining. The company's first-quarter numbers yesterday showed that it produced 628 tonnes of nickel in the first three months of the year, recording a net loss of €17m (£14m).

The figures were undoubtedly disappointing, although in fairness to Talvivaara, which lowered its full-year estimates, much of the trouble was caused by a three-and-a-half week outage caused by a hydrogen plant failure. The company's backers seem rightly to have accepted the problem is one of those endemic to the industry, and despite yesterday's results the share price has stood up well. Indeed, over the past year, Talvivaara's shares have put on more than 100 per cent. There are other reasons to be optimistic. The next three months should be a better guide for the group's health and we believe its share price will continue to be supported by its off-take agreement with the giant Russian company Norilsk Nickel, and Talvivaara's plan to extend its bioheap leaching process, which allows it produce minerals from low-grade ore, to uranium mining.

We think there are undoubtedly better picks in the mining sector (before backing Talvivaara we would put money into Anglo American and other miners that will offer a dividend).

But there is still value in the shares, which trade on a 2012 forecast multiple of just 3.2 times. We are minded to be long-term backers but would wait for now and see if the company can have a better second quarter. Hold.

Tomkins

Our view: Buy

Share price: 232.8p (+4.3p)

Tomkins has had a good quarter. The engineering group, which is active in the industrial, automotive and building sectors, said yesterday that, compared to last year's final quarter, sales and adjusted operating profits had improved in the first three months of 2010. Encouragingly, its volumes were up, not merely because of the impact of restocking but because of higher demand. This sales increase, taken together with the company's own restructuring efforts, boosted margins. In fact, the group as a whole achieved double-digit margins.

Such a performance should by itself be enough to support the investment case. But Tomkins, which trades on multiple of just 11.3 times Collins Stewart's numbers for 2010, also boasts an undemanding valuation. Indeed, in terms of enterprise value to earnings, it is one of the cheapest stocks in the sector. Oh and by the way, if the share price keeps rising Tomkins could find itself in the company of the blue chips. Collins Stewart estimates that it could claim a berth in the FTSE if the price rises to 290p. That would bring new investors to the fore.

When we last looked at Tomkins, we suggested that it was an investment to avoid. But based on yesterday's evidence, it is time to reassess the group's prospects. We are happy to change our view and recommend beating them to it, so buy.