BHP Billiton Limited (ASX: BHP) has been given an "overweight" rating and a $37 price target by Morgan Stanley, implying a possible 26% upside from today's $29.35 price tag.
Although BHP Billiton's four key commodities are all trading near multi-year lows, the US banking giant believes that the stock is currently priced "below spot prices", creating a fantastic opportunity to buy. As quoted by the Fairfax media, Morgan Stanley said: "We allow that until oil prices stabilise, sentiment toward the equity may remain soft – but it is pricing in below spot prices currently, creating an opportunity, in our view."
Indeed, it's certainly possible that the market has priced in further falls for the commodities. While iron ore, for instance, is currently trading for around US$67 a tonne, some analysts expect it will drop below US$60. Similarly, while oil has dropped nearly 60% over the last seven months, some experts believe it could still have plenty of room left to fall.
Morgan Stanley also said that there was potential for some positive revisions in BHP's 2015 financial year (FY15) production targets. On Wednesday, the miner confirmed that it was on target to produce 255 million tonnes (Mt) of iron ore for the year, while it also confirmed guidance of 255 million barrels of oil equivalent. Meanwhile, it's still on track to record 1.8 Mt of copper, 47 Mt of metallurgical coal and 73 Mt of energy coal.
Should you buy?
As Australia's largest and most diversified miner, BHP Billiton remains the safest bet from the resources industry and the stock could well deliver fantastic returns over the coming years – particularly with its 5.2% fully franked dividend.
However, investors need to be aware that further falls in commodity prices are likely. While some of those falls may already be priced into the shares, the stock could certainly experience further volatility if any more weakness is experienced in the iron ore, copper, coal or oil divisions. Investors would be wise to remain on the sidelines for now and wait for prices to begin stabilising before making a move.
