Big Australian's share price still stuck in gridlock
Sydney Morning Herald
Friday November 6, 2009
MARKET leader BHP Billiton is suffering from a severe case of share price gridlock. For the past three months the resources king has been left to trade sideways due to a lower-to-flat earnings outlook for the year to next June.A slightly better than expected September quarter production report failed to break the sideways drift in the share price. Yesterday the stock closed at $36.44, or 3 per cent shy of its price at the start of August. The broader market is up 6 per cent in the same period.The lack of oomph in BHP's share price performance €“ Rio is up by 5.2 per cent €“ is despite BHP's outgoing chairman, Don Argus, talking up the outlook for commodities. He stopped short of using the 2003-2008 commodity boom terminology of things being "stronger for longer".But he might as well have, given that he recently told a packed Melbourne Mining Club luncheon that he believed "we stand at the threshold of an era of unprecedented growth due to demand generated by China and in the future, India".But judging by market expectations for BHP's near-term profit performance, the era of unprecedented growth will not start to have an effect until well in to 2011. And by extension, BHP could be that far off challenging its record share price of $49.55 set in May last year.A survey of profit estimates from six leading brokers €“ all after the release of the September production report €“ raises the prospect that BHP could well post a profit reduction for this year.On an average basis, the outlook is for a profit of $US10.17 billion ($11.2 billion), down from last year's $US10.72 billion and well below the record $US15.3 billion posted in the boom 2007-08 year. The profit estimates for this year range from $US9.68 billion to $US12.15 billion, with the variation explained by commodity and currency assumptions used by the various broking firms.Where there is agreement is that BHP has yet to reap the full benefit of its massive investment in oil/gas projects in the Gulf of Mexico and in Pilbara iron ore. The full benefit of those new developments and expansions, along with relatively modest commodity price assumptions, has broker forecasts for BHP's profit pick up to an average of $US14.83 billion in 2011 and $US16.77 billion in 2012.But even then, the market is not expecting BHP to be showering shareholders with dividends. From a dividend last year of US82c a share, it is, on average, expected to be about US93c in 2012. BHP could nevertheless look to sweeten things for shareholders through a share buyback.A Macquarie report on BHP after the release of its September report summed up BHP's profit outlook best. It talked about a reversion to sustainable earnings, not peak cycle earnings."Macquarie said the bulk commodities businesses of iron and coal would underwrite BHP's near-term earnings. "When combined with projected volume growth in the high margin petroleum division, we expect a reversion in profitability towards a higher sustainable level of (plus or minus) $US13 billion."
© 2009 Sydney Morning Herald