Earnings Scorecard: BHP Billiton (BHP)

BHP Billiton Ltd. (BHP) reported better-than-expected results for fiscal 2010 with an EPADR of $4.47, much above the Zacks Consensus Estimate of $3.54. The gradual recovery in market demand as well as increase in the prices of commodities attributable to the new pricing system was the prime factor behind the encouraging results.

Analysts are optimistic about the market improvement and the recent proposed acquisition of Canada’s Potash Corp. of Saskatchewan Inc. (POT), the world’s biggest fertilizer manufacturer. However, they are concerned about the undefined upper-limit of the takeover offer price, which is expected to exceed $150 per share from $130 per share offered earlier.

Earnings Review

During fiscal 2010, BHP Billiton recorded net income (excluding special items) of $12.5 billion, up 16.3% year over year from $10.7 billion in fiscal 2009. Earnings per ADR excluding special items also grew to $4.47 from $3.83 in the previous year. It surpassed the Zacks Consensus Estimate of $3.54 per ADR.

Revenues increased 5.2% to $52.80 billion from $50.2 billion in fiscal 2009. Adjusted EBIT (earnings before interests and taxes) was $19.7 billion, an increase from $18.2 billion and EBITDA (earnings before interests, tax, depreciation and amortization) grew to $24.5 billion from $22.3 billion.

In the second half of fiscal 2010, BHP Billiton switched from an old annual benchmark price to a quarterly pricing system, which increased the prices of commodities by a significant rate.

Detailed discussion of the earnings release can be found at: BHP Reports Above Expectations

Agreement of Analysts

BHP Billiton is committed to its long-term growth through its key investment strategy. During fiscal 2010, the company delivered five growth projects and approved two major growth projects with a total budget of $695 million. Moreover, the company made pre-commitments totaling $2,237 million and started to work on another four projects. The company has 20 projects in hand at present for a total budget of $25 billion and the recent takeover offer of Potash is also expected to materialize soon.

The company’s long-term strategy of investing in value-added projects with descent results for fiscal 2010 inspired one analyst out of four covering the stock to raise its fiscal 2011 earnings estimate, with none lowering them. However, for fiscal 2012, out of 3 analysts, one analyst based on the slower marker recovery has moved estimates in the downward direction, while none increased it. Thus, the overall trend was Neutral.

Magnitude of Estimate Revisions

For fiscal 2011, estimates went up to $5.15 from $5.03 earlier and for fiscal 2012, estimates decreased by a penny to $4.94 from $4.95 per ADR.

Our Take

BHP Billiton’s long-term strategy of investing in value-added projects with the recent proposed acquisition of Potash will bear fruitful results. The ongoing industrialization in China will improve the demand and price of its products in future. Moreover, a progressive dividend policy and joint venture with Rio Tinto raises shareholder value, which is encouraging.

However, uncertainty with regard to an upper-limit of the takeover offer price coupled with the vague synergy benefits tends to be gloomy. The extremely cyclical nature of its products, a highly competitive industry, and a slower market recovery are also matters of concern. Thus we reiterate our Neutral recommendation. Pending the proposed acquisition, the stock currently retains its short term “Sell” rating, equivalent to the Zacks #4 Rank.

BHP BILLITN LTD (BHP): Free Stock Analysis Report

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