South32 Ltd shares plunged 7.5% yesterday: Is it a bargain?

Just because the share price is lower doesn't make South32 Ltd (ASX:S32) a good investment.

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What happened? BHP Billiton Limited (ASX: BHP) spin-off South32 Ltd (ASX: S32) saw its share price plunge another 7.5% on Tuesday to within touching distance of the company's all-time lowest close of $1.40.

So What? The fall came on the back of absolutely no new news by the company but occurred on a day when Australia's other major mining companies, including BHP Billiton Limited, Rio Tinto Limited (ASX: RIO), and WHITEHAVEN COAL LIMITED (ASX: WHC) fell heavily.

Now What? Despite the shares being roughly 12 cents cheaper at $1.54 at the end of the day, little has changed for the company. For the 12-months ending June 30, South32 reported that underlying earnings rose 41% to US$575 million, up from US$407 million in the prior year, although revenue fell by 7% to $7.7 billion on a pro forma basis.

Basic underlying earnings per share (EPS) came in at 10.8 US cents, implying a price to earnings ratio of 14.26, while analysts are predicting EPS could drop as low as 5 cents in the 2016 financial year. The consensus estimate of 8.3 cents per share in 2016 implies that South32 trades on a lofty price to earnings ratio of 18.5 and a measly dividend yield of just 2%!

For comparison, analysts expect BHP to realise an earnings per share of 90.3 cents this financial year, implying a price to earnings ratio of 25.96, so perhaps South32 is cheap?

I'm inclined to think that South32 isn't cheap. Even companies involved in gambling, the social equivalent to mining to the environment, look like much better value. Crown Resorts Ltd (ASX: CWN) shares are also close to 12-month lows but is trading on a forward price to earnings ratio of just 13.7 and a dividend yield of 3.5%!

Motley Fool contributor Andrew Mudie owns shares of Crown Resorts Limited. You can find Andrew on Twitter @andrewmudie Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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