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Here's Why You Should Add BHP Group (BHP) to Your Portfolio

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Zacks Equity Research
·5 min read
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BHP Group BHP is poised to gain from efforts to make operations more efficient on the back of smarter technology adoption, which in turn will lead to lower costs and boost margins. Focus on lowering debt, the rally in iron ore prices and recovery in copper prices will also aid growth. The company has six major projects under development in petroleum, copper, iron ore and potash, which will contribute to growth in the long run.

BHP currently carries a Zacks Rank #2 (Buy). It has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities for investors.

Factors Favoring BHP Group

Positive Estimate Revision Activity: The Zacks Consensus Estimate for fiscal 2021 have moved north by 13% over the past 60 days.

Positive Growth Estimates: The Zacks Consensus Estimate for fiscal 2021 is currently pegged at $4.74, indicating year-over-year growth of 32.4%. The company has an estimated long-term earnings growth rate of 4.1%.

Price Performance: BHP’s shares have gained 18.9% over the past three months compared with the industry’s rally of 12.1%.



Underpriced: BHP has a trailing EV/EBITDA ratio of 5.14, which is lower than the industry average of 17.55.

Growth Drivers in Place

Betting on Technology to Drive Margins: BHP will continue to gain on efforts to make operations more efficient on the back of smarter technology adoption across the entire value chain. This has led to 30% lessening in overhead costs and 35% reduction in workforce in fiscal 2019. Since late 2019, autonomous trucks have been deployed at three additional mine sites across coal and iron ore. The company continues to explore the potential expansion of this technology to its other Australian iron ore and coal mine sites.

Ongoing Investments to Aid Growth: Capital and exploration expenditure is anticipated to be around $7 billion in fiscal 2021 and approximately $8.5 billion in the next fiscal. As of fiscal 2020 end, BHP Group had six major projects under development in petroleum, copper, iron ore and potash with a combined budget of $11.4 billion over the life of the projects.

Strong Liquidity Position: Over the 2016-2020 timeframe, BHP Group’s long-term debt level has gone down at a CAGR of 5% while its cash position has improved at a CAGR of 15%. As of fiscal 2020 end, the company’s net debt stood at $12.0 billion — at the lower end of its targeted range of $12 billion to $17 billion. Further, the company has maintained a streak of generating cash flow of above $15 billion for four consecutive years now. Backed by robust cash flow, strong liquidity position and low cost operations, BHP Group is poised well to navigate through these troubled times.

Improvement in Metal Prices: Iron-ore prices have gained 49% so far this year amid supply concerns while demand in China remains strong. The recovery in demand in top consumer China has also led to a rebound in copper prices lately. Nickel prices have also gained on supply concerns. This bodes well for the company.

The long-term prospects for metal prices remain solid. Going forward, growth in world steel production spurred by urbanization will fuel demand for iron ore and help sustain prices. The long-term outlook for copper is positive as demand is expected to grow, driven by electric vehicles and renewable energy and infrastructure investments, However, grade decline and scarcity of high-quality future development opportunities continue to constrain the industry’s supply. This demand supply imbalance will push copper prices north.

Demand for nickel in electric vehicle batteries will continue to grow. For potash, annual demand growth of 2-3% is expected over the next decade. Potash prices will also gain from demand-supply imbalance.

Other Stocks to Consider

Some other top-ranked stocks in the basic materials space are Bunge Limited BG, Koppers Holdings Inc. KOP, and Rayonier Advanced Materials Inc. RYAM. While Bunge and Koppers sport a Zacks Rank #1, Rayonier Advanced Materials carries a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bunge has a projected earnings growth rate of 43% for the current year. The company’s shares have gained around 36% in the past three months.

Koppers has an expected earnings growth rate of 16% for the ongoing year. Shares of the company shares have appreciated 28% over the past three months.

Rayonier Advanced Materials has an estimated earnings growth rate of 92% for 2020. Over the past three months, the stock has soared nearly 146%.

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BHP Group Limited (BHP) : Free Stock Analysis Report
 
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