Headquartered in Melbourne, Australia, BHP Group (BHP) explores for, develops, and produces oil and gas properties, and mines for copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal. The miner received regulatory approvals for the unification of its corporate structure last month. BHP merged with Billiton Plc in 2001 and now intends to consolidate the two companies and keep its primary base in Sydney, which is expected to be completed this month. Also, Australia’s competition regulator approved Woodside Petroleum’s merger with BHP’s petroleum arm, targeting the completion of the transaction for the second quarter of 2022. The merged company is expected to have a higher margin oil portfolio and a resilient financial position.
The global demand for copper, nickel, and cobalt is rising because of the widespread transition away from fossil fuels. The use of nickel and copper in electric vehicles (EVs) and other renewable energy infrastructures is driving the demand for these metals higher. Vandita Pant, BHP’s Chief Commercial Officer at the FT Commodities Asia Summit, stated that the global need for copper would double over the next 30 years, while nickel might quadruple over the period. BHP is well-positioned to capitalize on the growing demand.
Mining companies minted bumper profits last year as metal prices rallied, while the energy transition driving the next commodity supercycle could slate metals ‘to become the new oil.’ BHP’s profit soared 42% to$11.30 billion in the first half of 2021, driven by record margins of 64% on iron ore from its mines in the Pilbara. And BHP’s shares have gained 14.9% in price over the past three months and 12.5% over the past month to close yesterday’s trading session at $61.32. The stock is trading above its 50-day moving average.
Here is what could shape BHP’s performance in the near term:
BHP Looks Undervalued at its Current Price Level
In terms of forward P/E, BHP is currently trading at 9.70x, which is 36.2% lower than the 15.22x industry average. Also, its 5.18x forward EV/EBIT is 59.4% lower than the 12.75 industry average. Furthermore, BHP’s 5.25 forward Price/Cash Flow ratio is 41.1% lower than the 8.91 industry average.
Impressive Profit Margins
BHP’s respective gross profit and net income margins of 88.20% and 18.46% are 189.2% and 116.9% higher than the industry averages. Also, its 30.99% levered FCF margin is 362.7% higher than the 6.70% industry average.
Furthermore, BHP’s 22.81%, 10.38%, and 23.63% respective ROE, ROA, and ROTC compare with the 11.93%, 5.28%, and 7.58% industry averages.
Solid Financial Growth
BHP’s revenue has increased at a 12.4% CAGR over the past three years and 16.1% over the past five years. Furthermore, the company’s EBITDA and EBIT have grown at CAGRs of 17.9% and 24.3%, respectively, over the past three years. Also, its net income increased at a 45% CAGR, while its EPS grew at 21.6% CAGR over the same period.
POWR Ratings Reflect Growth Prospects
BHP has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a B grade for Value, which is consistent with its lower-than-industry valuation multiples.
BHP has a B grade for Quality. Its high-profit margins justify this grade.
Of the 35 stocks in the Industrial – Metals industry, BHP is ranked #5.
Beyond what I have stated above, one can also view BHP’s grades for Sentiment, Growth, Momentum, and Stability here.
View the top-rated stocks in the Industrial – Metals industry here.
As one of the largest mining companies, BHP is expected to benefit significantly from the growing metal demand worldwide. Moreover, the company has delivered stable financial growth over the past years. In addition, its high-profit margins and reasonable valuation make it an ideal bet.
How Does BHP Group (BHP) Stack Up Against its Peers?
BHP has an overall POWR Rating of B. However, one could also check out these other stocks within the Industrial – Metals industry with an A (Strong Buy) rating: Ryerson Holding Corporation (RYI), Atkore International Group Inc. (ATKR), and Rio Tinto Plc (RIO).
Note that ATKR is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
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BHP shares were trading at $62.00 per share on Wednesday morning, up $0.68 (+1.11%). Year-to-date, BHP has gained 2.73%, versus a 0.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...
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