For investors in BHP Billiton Limited (ASX: BHP), the last year has been exceptionally tough. The mining giant has posted a share price fall of 31%, with a decline in its bottom line of 25% in its most recent financial year being a key reason for worsening investor sentiment. And, with BHP Billiton expected to see its net profit decline by a further 68% in the current financial year, things are set to get worse before they get better.
However, according to John Rockefeller, the time to buy any stock is when blood is running in the streets. In BHP Billiton's case, this situation appears to have been reached, with most investors writing off its chances for a sustained recovery given the uncertain outlook for China and for global commodity prices.
During this time, though, BHP Billiton is implementing what appears to be a very sound strategy to position itself for long-term growth. For example, it has already spun-off non-core assets in the shape of South32, which should allow the company to refocus its attention on core operations and generate efficiencies in future years.
Furthermore, it has reduced capital expenditure is specific areas, such as in its petroleum division where it fell by 6% in the most recent quarter, as it seeks to ensure that its financial standing remains strong. Additionally, BHP Billiton is seeking out potential acquisitions (particularly in the oil space) where it can buy high-quality assets at distressed prices and position itself for future growth.
In addition, BHP Billiton has also increased production in recent years so as to offset (albeit to a limited degree) the impact of falling commodity prices. In the medium to long term this should at least maintain its market share and allow it to be well-positioned to take advantage of any firming up of commodity prices in 2016 and beyond.
As well as a sound strategy, BHP Billiton also has a relatively stable financial position. For example, it reduced net debt levels in the most recent financial year by US$1.4bn to US$24.4bn. Furthermore, it maintained its solid A credit rating, which indicates that it is very likely to emerge from the current challenges in the commodity markets in decent financial shape. And, with US$6.3bn of free cash flow being generated in the 2015 financial year, it appears to have sufficient resources to invest for future growth and also continue to adopt its progressive dividend policy.
Meanwhile, BHP Billiton's profitability is expected to improve significantly next year. As mentioned, the current year is set to see a further large-scale decline in its bottom line, but in the financial year 2017 BHP Billiton is due to report a rise in its net profit of almost 20%. Clearly, this would not take the company back to its prior level of profitability, but it does have the potential to significantly improve investor sentiment in the stock and show that the changes it is making have the potential to push its profitability and share price higher.
Therefore, due to an improved outlook, a sound strategy and stable financial footing, BHP Billiton could be a shrewd buy for the long term.
