Should I Buy BHP Billiton?

Should I buy BHP Billiton?

Is it a bargain or will China rain on its parade?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 10, 2012 10:49 am AEDT

It's time to go shopping for shares, but where to start? Expanding insurer Insurance Australia Group (ASX: IAG)? Telco Telstra Corporation (ASX: TLS)? Or oil and gas major Woodside Petroleum (ASX: WPL)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy BHP Billiton (ASX: BHP)?

Of mice and men (and miners)

Miners are for men. If you're feeling all pumped up by prospects for the global economy, you'll want to grab a fistful of mining companies such as BHP Billiton, or Rio Tinto (ASX: RIO), and prepare to hit pay dirt.

But if you think the economy will squeak instead of roar, you may scurry for cover instead. The question I'm asking myself is: am I a mining man or a defensive mouse?

Going down

The miners weren't looking too macho in the first half of this year, with some falling up to 30%. BHP Billiton was down 16%. Suddenly, mining stocks were looking cheap.

Then European Central Bank president Mario Draghi upped his efforts to save the euro and the US Federal Reserve announced QE3, and commodity stocks rebounded, as they do whenever central bankers ease monetary policy. All that extra liquidity has to go somewhere.

BHP Billiton is back at $33.47, at time of writing, although well off its 52-week high of $39.21.

Olympic loser

Aside from virtual money printing, is there a case for investing in the miners? We're supposed to be in the middle of a commodity super-cycle, but the industry is clearly beginning to have its doubts.

BHP Billiton saw its profits fall 35% in the year to June 2012, largely thanks to weaker commodity prices. After postponing its plans to build the world's largest open pit mine, the US$20bn Olympic Dam project in Australia, chief executive Marius Kloppers predicted a continuing long-term decline in prices. That's always a particular problem for miners, because of their high fixed costs. BHP Billiton is retrenching, with no major projects planned for 2013.

China syndrome

Blame it on China, partly, whose manufacturing industry has now fallen for two successive months. The country's GDP growth has now slowed to "only" 7.6% a year, a three-year low. The forthcoming change in Chinese leadership will only add political uncertainty to economic uncertainty.

Then again, if China's new leadership offsets the slowdown by going on a spending splurge, then mining stocks may extend their recent recovery.

Recovery stock?

BHP Billiton is nicely diversified, with the group's operations divided into nine divisions, covering areas such as base metals, petrol, iron ore, coal, diamonds and gold. It employs 41,000 people across 25 countries, but despite its size, it remains at the mercy of events it can't control, including global demand, currency movements and natural disasters. Investors must brace themselves for volatility.

BHP Billiton's prospects could brighten if it is correct in predicting that the global economy will stabilise in the first half of 2013 then start to pick up. It is also a net beneficiary of the rising oil price.

Yielding 3.2%, covered 2.9 times, you get a reasonable reward for buying and holding this stock. On a forecast price-to-earnings ratio of 11 times earnings for June 2013, you aren't paying over the odds, either. Nothing wrong with BHP Billiton; the question is, is there anything seriously wrong with China?

I'm holding, but I'm not buying right now. Or maybe I just need to man up?

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Motley Fool writer/analyst Mike King owns shares in BHP and Woodside Petroleum. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Harvey Jones, originally appeared on fool.co.uk. It has been updated by Mike King.

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