Why BHP Billiton plc Should Be A Winner This Year

I’m taking a look around some of our top FTSE 100 companies and examining their prospects for 2014. So, how is BHP Billiton (LSE: BLT) (NYSE: BBL.US) likely to fare in 2014, after having had such a tough 2013?

Let’s examine the miner’s performance over last five years’  together with the latest forecasts:

Jun Pre-tax EPS Change Dividend Change Yield Cover
2009 $11,617m 192.7c -30% 82c   3.7% 2.4x
2010 $19,572m 224.1c +16% 87c +6.1% 3.0% 2.6x
2011 $31,255m 393.5c +76% 101c +16% 2.5% 3.9x
2012 $23,022m 321.6c -18% 112c +11% 3.8% 2.9x
2013 $17,872m 221.7c -31% 116c +3.6% 4.2% 1.9x
2014(f) $22,414m 260.0c +18% 123c +6.0% 4.2% 2.1x
2015(f) $24,001m 284.2c +9% 131c +6.5% 4.5% 2.2x

Why is it down?

Along with the rest of the mining sector, like Rio Tinto who I took a look at earlier in the month, BHP Billiton has suffered a couple of years of weakening profits, hit by falling prices in the commodities markets. And that’s partly because growth in China has been slowing and demand for all that valuable dirt that BHP digs up has fallen.

But look at what BHP produces — iron ore, oil & gas, copper, coal, potash, aluminium… Do we really think demand for such essentials is in anything like a long-term decline? No, of course it isn’t, because it’s stuff that the modern world is literally made from.

The share price

BHP’s share price is down around 15% over the past 12 months, to around the 1,795p level — while the FTSE has gained more than 10% over the same period. And if we look further back into the recessionary gloom, things look even worse — we see a decline of nearly 30% for BHP shares against a 12% rise for the FTSE.

But I reckon the BHP price really does look to have bottomed out. In fact, over the second half of 2012 it looked like the recovery might have been on, though bullish economic sentiment proved to be a little premature and the first half of 2013 took the price right back down again.

The recovery is on

But since summer 2013, things have looked stable, and it’s over that timescale that we really have been seeing pretty solid evidence of economic recovery. The eurozone isn’t going to collapse just yet (not this time, anyway), and the US Federal Reserve is confident enough to scale back its quantitative easing.

And China? Well, what do you know, it’s still there! And growth is starting to pick up again. And even if it wasn’t, China’s relatively slow recent growth of around 7.5% per year was still something that most countries can only dream of.

Undervalued, surely!

Forecasts for BHP Billiton already suggest a return to profit growth, and put the shares on a forward P/E for June 2014 of a little over 11, falling to nearer 10 based on 2015 figures. And dividend yields are expected to be significantly better than the FTSE average, at 4.2% for the current year and 4.5% next.

And that to me means the shares are too cheap.

Verdict: Off the bottom for 2014!

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> Alan doesn't own any shares in BHP Billiton or Rio Tinto.