Standing out among the Street's worst performers today is BHP, a thermal coal company whose shares slumped -4.4% to a price of $55.19, 9.15% below its average analyst target price of $60.75.
The average analyst rating for the stock is buy. BHP lagged the S&P 500 index by -5.0% so far today and by -35.8% over the last year, returning -0.6%.
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 17.7, based on its trailing EPS of $3.11. The company has a forward P/E ratio of 12.5 according to its forward EPS of $4.42 -- 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 third quarter of 2024, the energy sector has an average P/E ratio of 13.62, and the average for the S&P 500 is 29.3.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into BHP market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing BHP's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -2.79. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
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 $20.66 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $13.76 Billion and they've been growing at an average rate of 12.3%. 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 2.5% 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 6.24 -- in other words, the market value of the company exceeds its book value by a factor of more than 6, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.86 as of the third quarter of 2024.
BHP is likely undervalued at today's prices because 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. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and an average PEG ratio. We hope this preliminary analysis will encourage you to do your own research into BHP's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
