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BHP is Significantly Undervalued

The Value Investor: In the first in a new series on underappreciated assets, we a highlight UK stock that our analysts think could be a good contrarian investment

Emma Wall 16 January, 2014 | 11:34AM
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Investor confidence has grown significantly since the global recession. Thanks to significant stock market rallies in the UK, America and Japan, investors are ready to take bets on equities which could offer growth - instead of being solely preoccupied with income. 

Value investing is the art of picking up stocks that are trading at less than their intrinsic value. The most famous value investor is Warren Buffett, who warns against going the way of the crowd - preferring instead to contrarian invest, buying stocks that the market is less interested in.

In order to help you master the art of contrarian investing Morningstar.co.uk is launching a new weekly series where we will highlight a stock, fund or investment trust which our analysts believe to be trading at less than its fair value. Every Thursday we will reveal the holding's star rating and Morningstar analyst rating; which determine whether it is fairly valued, how it has performed and whether it is likely to outperform its peers in the future.

First up, is five-star mining stock BHP Billiton.

BHP Billiton (BLT)

BHP is a beneficiary of continued global economic growth and increased demand for the commodities it produces. BHP's cash flow base is diversified, and the company is less susceptible to the vagaries of the market than single-commodity producers. But BHP is subject to the long-term supply/demand balance for metals, a major factor in determining the company's profitability.

Chinese mineral investment, for production rather than profit's sake, could erode some of the limited pricing power mining companies have recently won.

But the company has an attractive, low-cost, long-life portfolio of expandable operations. Growing producer concentration is slowly tipping pricing power away from the end user and toward miners. With a fair value estimate of £26.65, BHP is currently trading significantly under value according to Morningstar analysts. The decline in commodity prices are in part to blame for this, but the global economy is recovering – with developed markets leading the way – and commodities do well when there is global growth.

BHP is the world's largest publicly traded mining conglomerate, with the wherewithal to weather the boom-and-bust cycles of the volatile commodity markets. Geographic and product diversification give BHP more stable cash flows and lower operating risk than most of its mining peers. Most revenue comes from the relative safe havens of Australia/New Zealand, North America, and Europe.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar