BHP Billton: Production Is Increasing But More Patience Is Needed

| About: BHP Billiton (BHP)

BHP Billiton Ltd (NYSE:BHP), with a market cap of $103.46B, is a global, diversified resources company engaged in discovering, acquiring, developing, and marketing natural resources, producing major commodities such as aluminum, copper, energy coal, iron ore, and manganese, among others. Although it may still be too early to invest into industrial metals & minerals, BHP continues to cut costs and production improvement had been seen.

Increasing Production

On April 17, 2013, BHP reported improved quarterly year-over-year production data, ended on March, for most of its segments. Despite the declining yield on petroleum, lead, gold, silver, diamonds and energy coal, the production for aluminum, nickel, copper, zinc, iron, manganese alloy and metallurgical coal had all increased compared to the same period a year ago. BHP had also closed its diamond business by selling its stake in the EKATI mine on April 10 for $533M. Similar to BHP, another major mining giant, Rio Tinto Plc (NYSE:RIO) also posted an increase in most of its products for the quarter.

Cost Cutting

BHP's new CEO Andrew Mackenzie is determined to cut costs and increase productivity, starting with his much lowered salary. With the new organization structure, petroleum and potash, copper, iron ore, coal, aluminum manganese and nickel units will report directly to new CEO.

Analysts' Calls and Estimates

On April 22, 2013, HSBC upgraded BHP from neutral to overweight. Analysts currently have a mean target price of $63.83 for BHP, which is below the current price of $64.43 as of April 22, 2013. Analysts, on average, are estimating an EPS of $3.78 with revenue of $68.64B, which is 5% lower than 2012. However, for 2014, analysts are projecting an EPS of $4.16 with revenue of $79.45B, which is 15.70% higher than 2013.

Fundamentally, BHP's key stats will be compared to its peers in the industry of industrial metals and minerals, including Rio Tinto PLC and Vale SA (NYSE:VALE) to see where it stands.

BHP Billiton

Rio Tinto

Vale

Industry Average

Cap Size

$103.46B

$82.29B

$82.61B

N/A

Closing Price (April 22, 2013)

$64.43

$44.55

$16.03

N/A

Beta

1.48

1.81

1.49

N/A

Revenue Growth (3 Year Average)

12.9

6.8

27.0

-8.2

Operating Margin, %, ttm

32.9%

-2.3%

19.3%

20.7%

Net Margin, %, ttm

21.4%

-5.9%

11.6%

12.3%

ROA

13.3

-2.5

4.2

4.9

ROE

25.1

-6.0

9.3

8.3

Debt/Equity

0.4

0.5

0.5

0.4

P/E

11.1

-27.7

15.0

93.5

Forward P/E

17.5

6.3

6.3

14.3 (S&P 500's average)

Projected Dividend Yield

3.54%

3.72%

5.13%

N/A

Click to enlarge

Source: Google Finance and Morningstar

Compared to RIO and VALE, BHP has the highest margins and strongest ROE and ROA with a healthier debt/equity ratio of 0.4. From the valuation perspective, BHP is undervalued with a P/E of 11.1 as compared to the industry average of 93.5. VALE, on the other hand, has the highest revenue growth average in the past 3 years and offers the highest dividend yield.

Technically, BHP is on a long-term down trend since mid-February, 2013. BHP is currently trading below its down trend supporting line, as well as the 50-day MA and 200-day MA, as seen from the chart below.

Click to enlargeSource: Finviz.com

Both RIO and VALE are on a long-term down trend since early 2013 as seen from the charts below.

Click to enlarge

Source: Finviz.com

Click to enlarge

Source: Finviz.com

How to Invest

While it is still too early to bet for stronger global demand, valuation had fallen considerably for BHP as well as RIO and VALE. However, in the near-term, more price volatility is expected and more patience is required for investors. Long-term investors should continue to monitor the production data and wait for a safer entry point when the price starts to stabilize. Investors can also review the following ETFs, which have exposures to BHP:

  • BLDRS Asia 50 ADR Index Fund (NASDAQ:ADRA), 10.16% weighting
  • BLDRS Developed Markets 100 ADR Index (NASDAQ:ADRD), 3.21% weighting

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.