Concerns around weakening Chinese demand, the lackluster nature of the U.S. recovery, and cresting commodity prices, suggest a period of more subdued growth in the basic materials sector. Arguably, the fallout from the global financial crisis has been felt least in the land down under ... Australia. The Australian dollar is at 30 day highs, nearly at par with the U.S. dollar. It may follow that good companies to invest in may make Australia their home! One of Australia's largest companies is BHP Billiton (BHP). This goliath in the basic materials sector employs 100,000 full-time equivalents and boasts a market cap of about $178 billion. It trades at around $67. Today we will compare this giant with similar companies from other parts of the world and see how they match up.
BHP Billiton boasts some fairly impressive fundamentals. The trailing twelve month price to earnings ratio is a value leaning 7.84 and the price to earnings growth ratio is 2.18, by no measure ideal, but not a deal breaker either. Price to book is in the acceptable range, reported at 2.81. BHP Billiton has an enviable return on equity of 38.32% and positive quarterly year-over-year revenue growth of 9.9%. Unfortunately, we can't say the same for quarterly year-over-year earnings growth which crept into negative territory at -5.5%.
Income statements demonstrate that over the past 5 quarters, net income has been relatively flat, averaging about $9.6 billion. BHP Billiton's financial strength is impressive for such a capital intensive enterprise. Debt to equity is 38.79 and the current ratio is a touch weak at .85. Shareholders are favored with a robust dividend, yielding 3.5% against a payout ratio of 52%. BHP Billiton was upgraded recently by RBC Capital to "outperform". BHP Billiton suffered a setback recently when De Beers declined to bid on BHP Billiton's 80% stake in the EKATI diamond mine. The asset is said to be worth from $500 million to $1.5 billion and I look at it as 'money in the bank'. This company is likely to soar on any significant upturn in the economy and has demonstrated that it can hold its own in the bad times. It is trading below its 200 day moving average and now may be a good time to consider it for your portfolio.
Vale (VALE) calls Brazil home. Vale is a $103 billion company trading at around $20. Smaller than BHP Billiton, Vale outdoes its rival in some key areas. Vale's twelve month trailing price to earnings ratio is 6.52, slightly cheaper than BHP Billiton, but the price to earnings growth ratio of -0.73 is a red flag. Price to book for Vale is 1.41, just about one-half of BHP Billiton's price to book and another plus for Vale in this match-up. Although Vale's return on equity is eclipsed by BHP Billiton's, it is, nevertheless, a very good number. Vale's quarterly year-over-year revenue and earnings growth are both in a negative place, reported at -11% and -40.5% respectively; inferior to the results BHP Billiton reports. Vale has superior debt to equity and current ratios of 32.29 and 2.05 respectively. Vale shareholders are rewarded with a dividend yielding an awesome 9.3% against a payout ratio of 38%. Vale is placing a heavy bet on iron ore prices rising in the near future. Vale derives two-thirds of its income from iron ore, so the gamble is not that huge. If you concur that iron ore prices will rise, Vale is a good bet for your portfolio.
Cliffs Natural Resources (CLF) is a 'home grown' enterprise based in Cleveland, Ohio and sporting a market cap of about $7 billion. Tiny in contrast to BHP Billiton, it trades at around $52 per share based on a price to earnings of 4.70, a price to earnings growth ratio of 0.87 and a price to book of 1.18. So far, Cliffs Natural Resources looks rather strong as compared to BHP Billiton. The positives continue to build with Cliff Natural Resources' return on equity of 30.73% and quarterly year-over-year revenue growth of 6.9%. Quarterly year-over-year earnings growth declined, with Cliffs Natural Resources reporting -11.2%.
Cliffs Natural Resources' debt to equity and current ratios are 53.71 and 1.15 respectively. Shareholders receive a modest dividend yielding 1.8% against a miserly payout ratio of 9%. Cliffs Natural Resources recently announced it would be reducing thermal coal mining targets as a result of lower demand, primarily due to the availability of inexpensive natural gas. A reduction in workforce was implied by Cliffs Natural Resources' Senior VP of Global Coal Operations. Negative catalyst or sound management? I think it is the latter. I am impressed with Cliff's management and would not be at all embarrassed to have the company in my portfolio.
Alcoa (AA) is the number one player in aluminum with a market cap of over $9 billion and a share price of around $9. It is a comparatively expensive equity, trading at 24.44 times earnings making BHP Billiton look like a blue light special. However, the price to earnings growth ratio of 1.31 and a price to book of 0.67 certainly requires it be given a second look. That second look reveals modest 0.8% quarterly year-over-year revenue growth and earnings growth deep in negative territory at -69.5%.
Alcoa seems on sound financial footing with a debt to equity and current ratio of 55.28 and 1.25 respectively. Alcoa pays a reliable, albeit modest dividend, yielding 1.4% which represents a full third of its earnings per share. Alcoa seems to have an upcoming fight on its hands defending itself against bribery charges in a case that a Federal judge in Pittsburgh has just given the green light to move forward to trial. Perhaps in an effort to put lipstick on that pig, Alcoa announced its adoption of natural reforestation. The bribery case is unlikely to hurt Alcoa among investors and the natural reforestation ploy won't help much either. That said, Alcoa is a solid enterprise, but highly cyclical due to its narrow focus. I would choose to invest elsewhere.
Rio Tinto (RIO) makes its home in the United Kingdom and has a market cap about of $90 billion roughly half that of BHP Billiton. It trades at around $48 per share and has a near textbook price to earnings of 16.07 followed by a fractional price to earnings growth ratio of 0.35. Trailing that is a price to book of 1.71, suggesting the beginnings of a winner. Return on equity is somewhat disappointing at 10.95 and quarterly year-over-year revenue growth of 2.8% probably won't excite you either.
Quarterly year-over-year earnings growth is posted as "N/A" so I turned to the annual income statements which show some impressive year-over-year net income growth. Rio Tinto almost tripled its 2009 annual earnings in 2010. Equally impressive is Rio Tinto's financial strength as demonstrated by a debt to equity and current ratio of 36.23 and 1.46 respectively. Shareholders are also granted a decent dividend yielding 3.2% against a sustainable payout ratio of 39%. Rio Tinto, like rival Cliffs Natural Resources, is looking at possible job cuts and staff relocations to reduce costs and streamline operations. Rio Tinto is well worth further consideration. I believe shares are headed higher.
In closing, you should know that all these stocks are undervalued on a discounted cash flow basis. If I had to choose just one, my first pick would be Cliff, followed by Vale, BHP Billiton, Rio Tinto and finally Alcoa.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.