As some readers will be aware, I've been very bullish on both BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) over the last couple of years.
And even though both shares have run incredibly hard during this time, I still see a lot of value in them.
While I think both companies would be great investments, my preference continues to be BHP Billiton.
I believe that its diverse operations, undemanding valuation, and the positive outlook for the commodities it produces has positioned it to outperform over the next couple of years.
I'm not alone in thinking this way, either. According to a note out of Goldman Sachs this morning, its analysts have named six reasons why BHP Billiton is a better investment than Rio Tinto.
Reason one is BHP's diverse commodity base. The broker has pointed to Rio Tinto's reliance on iron ore after recent asset sales as a potential negative.
Reason two is its growth optionality. The broker believes BHP has better growth opportunities from brownfield expansions in stable jurisdictions, whereas Rio Tinto has only a few pockets of growth in relatively risky jurisdictions.
Reason three is its free cash flow generation. Goldman expects FY 2018 to be the first evidence of higher FCF. It has pointed to the potential offloading of its US shale assets as a future catalyst for higher returns.
Reason four is its shareholder returns. It has lagged Rio Tinto for some time now but moving forward its expects BHP to outperform Rio Tinto in this regard.
Reason five is its catalysts. The broker is of the opinion that BHP has a number of catalysts on the horizon that could give it a short term boost. These include its FY 2018 results, higher cash conversion, and asset sales.
Reason six is its valuation. The broker has pointed out that historically BHP has traded at a 3% premium to Rio Tinto's shares on 12-month forward EV/EBITDA basis. Whereas, at present it currently trades at a 10% discount.
In light of these six reasons, the broker has lifted its price target on BHP Billiton's shares from $35.50 to $40.00. This implies potential upside of almost 19% for its shares over the next 12 months.
Should you invest?
While there are risks that a global trade war could lead to a faltering global economy and weigh on commodity prices, I remain optimistic that this will be avoided.
As a result, I completely agree with Goldman Sachs on this one and believe BHP Billiton would be a great investment today.
