Thermal Coal company BHP is taking Wall Street by surprise today, falling to $57.26 and marking a -3.3% change compared to the S&P 500, which moved -1.0%. BHP is -10.88% below its average analyst target price of $64.25, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, BHP has underperfomed the S&P 500 by -22.3%, moving 0.3%.
BHP Group Limited operates as a resources company in Australia, Europe, China, Japan, India, South Korea, the rest of Asia, North America, South America, and internationally. The company is an energy company. As investments, energy companies may display higher than average volatility because the price and availability of basic materials needed for production is dependent on geopolitical events. The shift towards renewable forms of energy may lessen this dependency, but is far from complete and may involve new risks of its own.
BHP's trailing 12 month P/E ratio is 19.7, based on its trailing EPS of $2.91. The company has a forward P/E ratio of 28.1 according to its forward EPS of $2.04 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the energy sector has an average P/E ratio of 8.53, and the average for the S&P 500 is 15.97.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for BHP was $18.7 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $11.53 Billion and they've been growing at an average rate of 20.5%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in BHP have received an annualized dividend yield of 2.6% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Bhp's P/B ratio is 7.01 -- in other words, the market value of the company exceeds its book value by a factor of more than 7, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.78 as of the first quarter of 2023.
Since it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, BHP is likely fairly valued at today's prices. The company has mixed growth prospects because of an above average PEG ratio and decent operating margins with a negative growth trend. We hope you enjoyed this overview of BHP's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
