Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at BHP Billiton (LSE: BLT) (NYSE: BBL.US)
What is the sustainable competitive advantage?
BHP is the world’s largest mining company, able to take on mega projects and achieve economies of scale that many other miners cannot.
Having said that, the company is still a slave to the commodity markets and profits are highly dependent upon the global macroeconomic situation.
Indeed, over the past year or so, BHP’s operating income has been steadily declining and margins have been shrinking, as commodity prices remain under pressure. For example, after the company reported a record net income of $32bn during 2011, with an operating margin of 44%, the company’s operating margin slumped to 33% during 2012 and then fell further to 22%, during the first half of this year – despite rising revenues.
Furthermore, BHP’s recent attempt the enter the potash market has been scuppered, after a major potash pricing cartel collapsed, pushing down the price of potash and opening up the market to aggressive competition.
That said, BHP’s size and diversification means that the company is not overly affected by the declining price of one commodity. Indeed, the company has built its operations around four key commodities, iron ore, copper, coal and oil — all of which should see sustained demand over the longer term.
Company’s long-term outlook?
Over the longer term, BHP’s outlook is hard to predict. Many market commentators have now called the end of the commodity super cycle, indicating that for many mining company’s the days of high margins and profits are behind them.
However, BHP has been around for 150 years, so the company has proved that it is able to survive the ups and downs of operating within the mining industry.
Still, investors need to keep an eye on the company as its dependence on the global macroeconomic cycle means that BHP lacks a consistent cash flow. Moreover, investors are only likely to see increased returns when commodity prices are high and the company is highly profitable.
What’s more, the key to a good ‘buy and forget’ investment is the ability for the company to run itself. However, BHP’s operations require constant reviews and analysis by management, in order for the company to stay profitable, which leaves the company highly susceptible to poor management decisions.
Foolish summary
The commodity markets are highly volatile and any company that is dependent on such a volatile market is not a good ‘buy and forget’ investment no matter what its size or experience.
So overall, I rate BHP Billiton as a very poor share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
