Standing out among the Street's worst performers today is BHP, a thermal coal company whose shares slumped -5.1% to a price of $52.31, 14.77% below its average analyst target price of $61.38.
The average analyst rating for the stock is buy. BHP lagged the S&P 500 index by -3.0% so far today and by -31.4% over the last year, returning -5.8%.
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 classified within the energy sector. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -— meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.
BHP's trailing 12 month P/E ratio is 16.8, based on its trailing EPS of $3.11. The company has a forward P/E ratio of 12.3 according to its forward EPS of $4.27 -- 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 second quarter of 2024, the energy sector has an average P/E ratio of 13.84, and the average for the S&P 500 is 28.21.
To better understand BHP’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
BHP’s PEG is 32.42, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in BHP's free cash flow, which was $18.7 Billion as of its most recent 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 5.92 -- in other words, the market value of the company exceeds its book value by a factor of more than 5, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 2.05 as of the second quarter of 2024.
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 undervalued at today's prices. The company has mixed growth prospects because of an 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.
