Why BHP Billiton Limited is looking cheap now

One of the advantages that private investors have over professional investors is they can choose to ignore the market herd mentality and beat the market. With analysts scrambling for any update or company guidance to help adjust their forecasts, their time horizon on a company’s outlook becomes short. If you want to play their game, then you have to move just as quickly.

Or you can turn off the noise and tune in to what companies are doing to grow their business.

BHP Billiton Limited (ASX: BHP) is down about 2% in the last six months while the S&P ASX All Ordinaries Index (ASX: ^AORD) is up around 4%. Its stock is looking cheap now because it’s making changes over the next few years which should make it stronger.

Low cost producer –    As one of the lowest cost iron ore producers, BHP Billiton can weather a short-term bout of commodity weakness. Lower prices will squeeze smaller miners, but it can keep on producing at higher volumes. It knows that as China moderates its iron ore imports, countries like India will begin to import more.

China and India urbanising –   Both China and India are highly populated countries that need iron (for steel), copper and energy resources (coal and oil) to urbanise. BHP produces all these materials and long-term investors should be able to see how demand can rise over the coming years.

Oil diversification –   As a diversified resources company, its revenues will benefit from its rising oil production, which will help offset lower iron ore prices. It also expects its onshore shale oil projects in Texas, USA, to become cash flow positive in FY 2016.

Restructuring and cost cutting –   The “Big Australian” isn’t immune from the need to cut costs, so it is selling down its non-core assets and reducing its debt. A tighter balance sheet and improved margins will be a plus to the share price. Shareholders may even enjoy a special capital return once the company’s main financial objectives are met, so that is one more bonus.

Record profits and a fast growing, fully franked dividend...

BHP Billiton is the biggest company on the ASX, but is it the best stock to invest in? We know of a little known ASX company that has already delivered eight consecutive years of profit and dividend growth... but with even more growth ahead, the shares are still a firm "BUY" today!

Discover The Motley Fool's #1 dividend pick in our newly updated report. Simply click here for your FREE copy right now.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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