The BHP Billiton Limited (ASX: BHP) share price has been on a tear in recent times as the prices of key commodities staged a miraculous recovery.
BHP share price
Indeed, since the beginning of 2016, the BHP share price has risen around 50%. That compares to just a 9% return from the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), and a 50% return from rival Rio Tinto Limited (ASX: RIO).
Are BHP Billiton shares cheap?
By market capitalisation, BHP is Australia's second largest public company, behind Commonwealth Bank of Australia (ASX: CBA). And, yes, its shares have performed well in recent times.
However, if we zoom out of the chart above and look at the mining company's returns since the year 2000, the BHP share price is up only 30%. That does not include dividends, which rose strongly from 51 cents per share during the resources boom before settling at today's level of 72 cents per share. In all, it would be safe to assume BHP shares have returned a total of between 5% to 7% per year, on average, for long-term holders.
However, over the same period, the ASX 200 is up 85%, also not including dividends.
For a more thorough explanation of the underperformance of BHP's shares over the 17 years since 2000, we would need to look at the amount of capital that has gone into and out of the business.
However, let us not forget that during the past 17 years we have also experienced a once-in-a-lifetime resources boom in which BHP shares should have thrived. During this time, for example, China managed to use more cement in building infrastructure in three years than the American economy did throughout the entire 20th century.
So you would easily be mistaken to think that BHP, a supplier of resources, should have crushed the return of normal companies included in the ASX 200.
Of course, BHP investors have had their good times — if you timed the market.
However, if you are evaluating BHP as a long-term investment without the desire to time the market by jumping in-and-out of shares, you need to consider what you'll get from the company. It comes back to what the company can do with the capital it receives from sales, debt and equity. What can the company produce for every $1 invested in it?
If history is anything to go by, the answer is less than the market average.
If you have a shorter-term time horizon you could use analyst price targets, which are set for one year in advance. According to The Wall Street Journal, of the 21 analysts covering BHP shares eight of them have a buy rating. The average price target is $25.85 — surprisingly, that's slightly below the current market price of BHP shares.
For the record, I don't rely on analyst price targets. But even if I did, given BHP's history of modest returns compared to even the market, I would demand a wider margin of safety (the difference between price and value) before buying in.
In my opinion, BHP shares are not a good long-term investment today. But I could be wrong.
Fortunately, there are over 2,000 other companies on the ASX!
