Yesterday it was Rio, today all the focus of analysts is on BHP Billiton. The stock has been a dog, of course: down 28% over the last year and underperforming the ASX200 by 13% in the year to date. Not a great vote of confidence in management, even if one factors in bearish sentiment on iron ore prices and commodities in general. Quite a failure, in the short term at least, considering its global dominance. The question is, does it represent an investment opportunity? The analysts think so, which is worrying. Deutsche has a buy and price target of $44.50, expecting a rebound in production:
Apart from Met coal, we expect a strong rebound in volumes in FY13. Iron ore production has exceeded expectations with 174Mt in FY12 beating the original guidance of 158Mt set 12 months ago. FY13 guidance has been set at 5% higher equating to 183Mt (we were at 177Mt).
UBS has a buy and price target of $42, expecting volumes to increase but prices to be lower:
Macro head winds could cap share price appreciation in the near term The prospect of negative growth in Europe, a lack of stimulatory policy in China and a possible pause in the US recovery is weighing on sentiment towards the miners. The 3rd quarter can be seasonally soft as the northern hemisphere destocks through summer, and with steel prices declining in China, the outlook is for further weakness in iron ore pricing. The prospect of further declines in commodity prices on a weakening macro outlook is likely to limit near term share price performance in our view.
It is well priced, in other words. JP Morgan is rebasing for lower iron ore prices. Comparing Rio and BHP, it argues that BHP is the more conservative play, but Rio has the greater upside:
BHP still trades at a higher P/NPV multiple than RIO on our revised numbers. We acknowledge that in the event of another leg down in commodity prices, BHP’s diversification benefits could see the company hold up better from an EPS perspective, particularly if iron ore prices collapse. However a materially weaker macro is not our base case. On this basis we continue to prefer RIO due to a cheaper valuation, higher returning projects, and what appears to be a more flexible strategy.
Like Rio, BHP has a dividend yield above 3% and a forward earnings multiple below 10 times. It should be a safe play, but how safe are iron ore prices and other commodities? That is surely what is spooking investors (as opposed to analysts). Rightly so.