There are things to love and loathe about most companies. Today, I’m going to tell you about three things to loathe about the world’s biggest miner BHP Billiton (LSE: BLT) (NYSE: BBL.US).
I’ll also be asking whether these negative factors make BHP Billiton a poor investment today.
Year end
The majority of companies, including most FTSE miners, have a financial year that coincides with the calendar year. Not BHP Billiton. The company’s financial year runs from 1 July to 30 June.
That means a lot of work for investors in order to compare BHP Billiton with its sector peers on a like-for-like basis. In essence, we have to rewrite BHP Billiton’s income statement, cash flow statement and balance sheet with a December year end, by calculating last year’s second-half accounts (full-year numbers minus first-half numbers) and adding them to the current year’s first-half accounts.
Relative valuation
BHP Billiton’s out-of-sync year end can also lead us astray on its valuation relative to its rivals. Lazy investors who rely on ‘analysts’ forecasts’ without adjusting for BHP Billiton’s different year end may wind up with a flattering or belittling valuation of the company.
The table below shows some key forecast valuation numbers for BHP Billiton (current share price 1,910p) and Rio Tinto (current share price 3,069p), unadjusted for BHP Billiton’s oddball financial year.
| Company year end |
Forecast EPS ($) |
Forecast EPS growth |
Forecast P/E |
Forecast PEG |
|
|---|---|---|---|---|---|
| BHP Billiton | 30 Jun 2014 | 2.57 | +15.9% | 11.6 | 0.7 |
| Rio Tinto | 31 Dec 2013 | 5.04 | +0.2% | 9.5 | 47.5 |
BHP Billiton’s forecast price-to-earnings (P/E) ratio is around two points higher than Rio Tinto’s, but the former’s earnings-per-share (EPS) growth is much superior. As such, BHP Billiton has a very attractive PEG (P/E dividend by EPS growth) valuation number of 0.7 — a PEG of less than 1 being considered ‘good value’.
But let’s see what happens when we put BHP Billiton on a like-for-like footing with Rio Tinto. The table below shows BHP Billiton’s numbers calculated on the same December year end as Rio Tinto’s.
| Like-for-like year end |
Forecast EPS ($) |
Forecast EPS growth |
Forecast P/E |
Forecast PEG |
|
|---|---|---|---|---|---|
| BHP Billiton | 31 Dec 2013 | 2.42 | -4.3% | 12.3 | n/a |
| Rio Tinto | 31 Dec 2013 | 5.04 | +0.2% | 9.5 | 47.5 |
Suddenly, BHP Billiton looks a lot less attractive than Rio Tinto. BHP Billiton’s P/E has gone up to 12.3 from 11.6; EPS growth has gone from +15.9% to -4.3%; and the negative growth means the company doesn’t merit a PEG valuation at all, far less a highly attractive one!
New chief executive
BHP Billiton announced the appointment of a new chief executive on 20 February this year. The market’s response to the promotion of Andrew Mackenzie to the CEO’s seat wasn’t particularly welcoming: BHP Billiton’s shares dropped 2.3% on a day the FTSE 100 rose 0.3%; and by the end of the month the company’s shares had fallen 6.6%, underperforming both the market and rival Rio Tinto.
On top of that, Mackenzie’s recent decision to spend $2.6bn — ultimate cost $16bn according to some estimates — on developing a potash fertiliser deposit in Canada has “raised eyebrows” according to the Financial Times. BHP Billiton’s biggest shareholder is also apparently not best pleased: an analyst at BlackRock, an asset management group that owns 10% of BHP Billiton’s shares, has reportedly called Mackenzie’s decision “misguided”.
A poor investment?
BHP Billiton’s June year end is a pain and makes valuation comparisons with sector peers a time-consuming exercise for investors. Ultimately, though, this doesn’t in itself make BHP Billiton a poor (or good) investment.
I’ve shown you how BHP Billiton looks less attractive than Rio Tinto on forecasts to December 2013. However, BHP Billiton’s P/E of 12.3 is still on the value side of the wider market, and, if we do look ahead to June 2014, there’s that alluring PEG of 0.7.
BHP Billiton could prove to be a great long-term investment from current levels, particularly if the potash-project knockers are wrong, and new chief executive Mackenzie is on the mark when he says: “This is going to offer very high returns for shareholders in the decades to come”.
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> G A Chester does not own any shares mentioned in this article.
