Life as an investor in BHP Billiton Limited (ASX: BHP) has been tough in recent years. In fact, the company's share price keeps on falling and has shown no sign of sustainable upward momentum in over five years (except for the odd short-term rally). And, looking at the mining sector generally, there appears to be little in the way of potential catalysts to push prices higher and allow the likes of BHP to generate higher sales, greater margins and improved profitability. Is it time, therefore, to cut your losses before things get even worse?
A tough outlook
On the face of it, things could well get worse before they get better for BHP. That's because the company is forecast to see its earnings slide during the next two years, with earnings per share forecast to fall to $1.09 in financial year 2016 from $2.42 in financial year 2014. That's a fall of 55% and shows just how challenging the present time is for the company. As a result, investor sentiment could weaken further and, while it has a price to earnings (P/E) ratio of 14.9 at the moment (which is less than the ASX's P/E ratio of 16.3), it would rise to 24.7 next year if its current share price were to be maintained.
A changing company
However, it must be remembered that BHP is a company going through a major transitional period. And, moreover, it is choosing to do so at a very difficult time for the mining sector. As such, it is of little surprise that BHP is finding life tough, since the reorganisation of its assets into core and non-core (via the South32 spin-off) is a major undertaking that even when completed during more prosperous times would take significant resources, capital and time to complete. Therefore, while the short run is set to be tough for BHP, this is understandable.
A bright future
Of course, the long run is what matters and, on this front, BHP remains in great shape. That's at least partly because it has a sound balance sheet, strong cash flow and a capable management team. Furthermore, it is likely to generate efficiencies from being a smaller business post-divestment and, therefore, its cost base should be driven lower. And, should commodity prices remain low, BHP could emerge in the long run as a relative gainer due to its scale advantages. In other words, some short-term pain could be beneficial for BHP's long-term standing within the resources sector.
Looking ahead
Clearly, BHP is a relatively unpopular stock among investors at the current time – as highlighted by its share price fall of 26% in the last year. And, in the short run, things could get worse for the company and its share price could move lower. However, for long term investors, it remains a superb opportunity to buy a highly diversified, financially sound company which has significant scope to make the necessary changes to its business now in order to deliver improved performance in the long run. As such, for investors who seek to 'buy low and sell high', BHP seems to be an ideal candidate for investment.
