As the pundits debate whether the global economy is actually recovering, we remain focused on buying cheap assets. We assume legendary investors such as Buffett, Soros or Rogers are doing the exact same thing. What drives their investment strategy isn’t pundit chatter and fear mongering, but objective analysis and calculated risk. After the fact, every move they make often sounds like sage wisdom. But when they first take action, it often sounds like a horrible idea. At the moment, BHP Billiton Limited (NYSE:BHP) is a classic example, as it remains out of the market eye while offering an interesting opportunity.
Today there are concerns about a strengthening US dollar, there’s a potential for a weakening global recovery, abounding fears of a hard Chinese landing, and even alleged concerns about a U.S. “bankruptcy.” So, in what world does it make sense to look at a company that deals with commodities? Well, this world right here and right now - because anything related to commodities has been tagged as “risky,” and we like this misconception. After all, when last we checked, metals have been such an essential cornerstone of civilization that they named a few eras after them such as the Bronze Age, Copper Age and Iron Age. While metals and mining stocks are cyclical, that doesn’t mean BHP Billiton (NYSE:BHP) isn’t a prime name, as the market questions the state of the global economy.
The last thing any great investor wants is to be in agreement with everyone. If everyone agreed on something, an investor would likely pay higher prices for what he wants to buy. So we welcome the comments and opinions of investors who disagree.
We rate BHP a BUY, since it offers a diversified mining portfolio in low-risk regions of the world and stands to gain substantially if the global economy beats its currently low expectations.
The Beauty of Being a Mining Muscle Head
BHP is the Arnold Schwarzenegger of mining companies, and we love it. It’s the largest publicly traded mining firm and it has everything it needs to keep the title. Why do we like that? Well, on top of being the “muscle head” of the mining community, the firm maintains a low geopolitical risk profile with operations in Australia, Europe, the U.S. and New Zealand. We can’t say the same for many other mining firms, many of which are in far-flung parts of the world where the geopolitical landscape looks more like an episode of the TV show 24. Luckily, we doubt BHP will need to call on Jack Bauer anytime soon.
BHP has the financial strength and stability to not only weather global economic cycles but also take advantage of any opportunities they offer. Check the chart below to see what we’re talking about:
|Financial Health & Strength||2009||2010||Latest Quarter|
Commodity Reversal Provides Buying Opportunity
Metal commodities have been downwardly volatile and or somewhat flat for the year. With the market at-large questioning the growth of the global economy and China’s ability to sustain current growth, recent volatility shouldn’t be too surprising. Fortunately we don’t really care because one man’s trash is another man’s treasure. What matters is that mining companies such as BHP have finally cooled down a bit, offering us a buying opportunity.
From a price-multiple perspective, BHP looks more attractive than it did last year.
|Price Multiple Valuations||BHP||Industry||S&P 500|
We don’t see it as a steal, but, since market expectations are now more restrained, BHP has a higher likelihood of beating earnings estimates. BHP’s present price is a decent entry point, in our view, and we would be a buyer at lower prices if a correction occurs.
Printing Cash Like the US Federal Reserve
This firm seems to be generating cash about as fast as the U.S. incurs debt. So far, the firm has enjoyed return on equity of more than 30 percent [TTM]. Combine this with the fact that BHP’s operating margin [TTM] is 43.18 percent with $11.37 billion in free cash flow, and it’s tough not to like the company.
While China and India are currently the dominant commodity consumers, we feel that any slowdown in their consumption will be offset by increased demand from the developed world. In addition, while emerging markets have grown rapidly over the last decade, they still remain far below the standards of developed countries. There is still plenty of demand left. Combine that with any economic recovery, and we expect to see resources becoming strained, as we saw in the last decade. The takeaway here is that BHP is a waiting game with plenty of growth potential despite its size.
BHP Billiton Limited (NYSE:BHP) isn’t a quick trade it’s a global macro play for the patient investor. In this instance, time is an asset to investors . For those interested in riding the next commodity wave, this is a great name to ride.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.