BHP Billiton Limited sinks below $30: Where to from here?

Earnings could fall by more than 50% in 2015

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Giant resources company BHP Billiton Limited (ASX: BHP) has seen its share price fall below $30 for the first time in more than five years.

At the time of writing BHP shares were changing hands at $29.83, down 3.5% today. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down just 1.3%.

Shares in BHP have now dropped 18.6% in the past three months, hammered by the falling iron ore price, and more recently, the slide in oil prices. Those two commodities make up a substantial portion of the miner's annual revenues.

In 2014, 53% of BHP's earnings before interest and tax (EBIT) came from iron ore, and another 23% from petroleum and potash – although potash is a very minor contributor. Just over US$21 billion or 32% of revenues came from iron ore last financial year.

With a 44% fall in iron ore prices alone, that would equate to revenues falling to US$12 billion, and a 77% fall in EBIT. Thanks largely to fixed costs, or operational leverage, BHP would struggle to cut costs by 44% to offset the falling iron ore price.

A 30% fall in the price of oil, would see BHP's petroleum EBIT smashed by 84%, all else being equal. And if we assumed that other commodity prices stayed the same, BHP could see a massive fall of 61% in total group EBIT next financial year, from US$22.8 billion to just US$9 billion. So much for being more diversified than Rio Tinto Limited (ASX: RIO) – which makes 92% of net profit from iron ore.

That of course is an oversimplified calculation and ignores increased in production, lower costs, different exchange rates and a host of other inputs.

At the current share price of under $30, BHP is trading on a P/E ratio of 12.4x trailing earnings. That may appear cheap, but given the potential for earnings to fall by more than half next financial year, it no longer looks like a bargain. And the fully franked dividend yield of 4.4% could be slashed, so investors can't rely on that to tide them over until commodity prices recover.

While some analysts have already started cutting their earnings forecasts, they still seem to be more optimistic than reality. Expect more cuts to earnings forecasts to come, which will heap even more pressure on the giant miner's slumping share price.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »