BHP Billiton Now a 5-Star Stock

The global mining conglomerate's share price fall has pushed it into our rating bracket for the most undervalued stocks

Holly Cook 9 November, 2015 | 10:56AM
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Following a recent decline in the share price of BHP Billiton (BLT), on the back of a 'serious incident' at its iron ore join venture in Brazil, the global mining conglomerate is now significantly undervalued on the UK market, in Morningstar’s eyes.

Morningstar mining analyst Mark Taylor values the firm’s London-listed shares at 1,440p apiece, but last week’s slide saw the stock end the week at just 975p, implying there is upside potential of almost 50%. As such, the shares are now rated with 5 stars--a measure of the differential between the market price and our implied fair value estimate.

“The firm didn't overinvest to the same extent as peers in the resources boom, and returns on invested capital should recover from sub-4% fiscal 2016 lows to exceed the 9.4% weighted average cost of capital in three years,” Taylor wrote in a recent analyst report. “This supports our unchanged narrow moat and medium fair value uncertainty ratings on low costs.”

BHP Billiton 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 flow and lower operating risk than most of its mining peers, with most revenue coming from the relative safe havens of Australia/New Zealand, North America and Europe.

That said, there are some warning signs on the horizon such as the cooling demand for commodities and commodity-price weakness, as well as the sovereign and political risk that goes with running operations in a diverse spread of international locations.

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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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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