Angels vs Devils: Should You Invest In BHP Billiton plc?

Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at BHP Billiton (LSE: BLT) (NYSE: BBL.US), and listening to what the angel and the devil on my shoulders have to say about the company.

Macro fears weigh on prices

Like all commodities plays, the impact of investor sentiment on natural resources markets remains a huge worry for BHP Billiton’s revenues outlook. While pan-regional economic data still fails to present an accurate picture of the state of the global economy, and fears of potential monetary tapering by the Fed continue to swirl, this is likely to stem any improvement in commodity prices.

Indeed, recent import data last week from raw materials glutton China again raised questions over economic momentum there — copper purchases slipped a colossal 11.2% alone in October from the previous month, for example.

Expenditure continue to drop

The mining giant has made a good fist of getting expenditure under control to counter the threat of pressured revenues, however. And last month’s operational review revealed that it has followed the “$2.7bn reduction in controllable cash costs delivered in the 2013 financial year with strong momentum maintained [during July-September].”

Additionally, the company plans to cut capital expenditure to $16bn this year, and intends to slash capex levels further next year. It is also making steady progress in divesting non-core and underperforming assets, and has sold $6.5bn worth of projects since the start of 2013.

Market balances remain a worry

Despite this progress, however, a backdrop of worsening market fundamentals threatens to keep earnings hemmed for the foreseeable future. A stream of new supply coming entering the market, combined with still-subdued demand levels, continues to hang heavily over BHP Billiton’s earnings outlook.

Broker Liberum Capital recently noted that “We don’t envisage significant price improvement in key commodities over the next 12 months as much anticipated volumes in both iron ore and copper finally reach the market.”

A relatively cheap valuation

Still, many would consider BHP Billiton to offer decent value at current price levels, even though its share price has risen more than 10% in a little over a month.

The natural resources play currently deals on a prospective P/E rating of 12.2 for the year ending June 2014, comfortably below a forward average of 15.8 for the complete mining sector. And with a price to earnings to growth (PEG) rating of 0.7 for this year — well within bargain basement territory below 1 — at face value BHP Billiton looks great value for money.

A devilish stock pick

But for me, I believe that the firm remains a risky stock pick even at current price levels. There is no doubt that the company’s tenacious drive to rein in costs, and deliver a more streamlined vehicle concentrating on petroleum, coal, copper and iron ore, is making decent progress. Having said that, I believe that deteriorating supply/demand balances in several of the firm’s key commodities still weighs heavily on the firm’s earnings prospects.

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> Royston does not own shares in BHP Billiton.