Today I’ll be discussing the outlook for multinational mining company BHP Billiton (LSE: BLT), chip-designer ARM Holdings (LSE: ARM) and housebuilder Barratt Developments (LSE: BDEV). Which one is likely to achieve the best capital growth?
Overvalued miner
Anglo-Australian mining giant BHP Billiton has enjoyed a nice rally over the last few days, with the shares trading 18% higher than a week ago. In fact, the comeback began in the middle of January, since when the shares have gained an impressive 46%.
So is this just a temporary bounce, or a turning point in the fortunes of this mining goliath? Let’s look at the forecasts. City analysts are expecting the company to report a 90% fall in underlying profits to £175.76m for the year ending 30 June, followed by a strong rebound next year, when profits should jump by 206% to £537m.
If this ambitious growth is achieved it would still leave BHP on a price-to-earnings ratio of 35 for fiscal 2017. In my opinion the shares are too expensive even after factoring-in the massive growth figures for next year. Despite the massive declines in recent years, I think the shares have further to fall.
Growth at a price
In contrast to BHP, shares in UK chip-designer ARM Holdings have been relatively quiet over the last few months with little volatility. The Cambridge-based firm has achieved impressive growth over a number of years with little sign of a slowdown. Revenue has grown from £492m in 2011, to £968m in 2015, and is expected to break the £1bn threshold for the first time this year.
However, rapidly-growing technology firms usually come with premium ratings, and over the last five years ARM had traded on high earnings multiples ranging between 43 and 75. But things are a little different this year with the shares trading on 28.5 times forecast earnings, falling to 25.1 times for the year ending 31 December 2017. Does this mean the growth story is coming to an end?
Absolutely not. Consensus forecasts suggest a 44% rise in earnings this year, followed by a 13% improvement next year. So the growth story is set to continue, and the shares are relatively good value compared to the recent past. Investors who don’t mind taking on a higher level of risk, might want to take a closer look at ARM for continuing long-term growth.
Bargain builder
Housebuilder Barratt Developments seems to be experiencing a share-price downward adjustment in recent months, falling 18% since last October. So is this just a pull-back in the long-term upward trend, or the beginning of a new downtrend? A quick look at the numbers should give us a clearer picture of the way the share price should be heading.
Our friends in the City are predicting improved earnings of £544m for the current year ending 30 June, rising to £602m next year. So the strong growth continues, but does this mean the shares are on a sky-high rating?
Thankfully not. Barrett trades on 9.4 times forecast earnings for this year, falling to 8.5 for fiscal 2017. In my view the shares offer exceptional value and considerable upside potential for growth and value investors alike. Barratt certainly offers a better risk-reward profile than both BHP Billiton and ARM Holdings for those seeking capital growth.
