Bull and bear factors impacting BHP shares

Do the positives outweigh the negatives with BHP's shares? Let's find out.

When it comes to making an investment, it is always best to understand why some investors are bullish on an ASX share and why others are bearish.

Failure to do this could leave you nursing a heavy loss because of something you had not even considered to be a risk.

To give you an example of this, let's take a look at BHP Group Ltd (ASX: BHP) shares.

Bullish and bearish factors

Fortunately, in a recent note from Morgans, its analysts have laid out three bull points and three bear points for investors to consider.

Let's start with its bull points. These include its exposure to China's reopening, its production growth plans, and its relative safety. In respect to the former, it commented:

BHP's quality and robust fundamentals positions it as a key way to play a recovery in China's COVID-impacted growth. We also see this fueled by BHP's basket of commodity exposures. This could also benefit from an improvement in ex-China world fears of a global recession.

As for production growth, the broker said:

BHP is alone amongst the major iron ore miners in planning meaningful production growth. We expect it will get the required approvals to expand to 330mtpa in the medium term. While Jansen (potash) continues to shape up as a solid fifth pillar.

Finally, another reason to be bullish on BHP shares is the broker's view that the Big Australian is a safer than average option in the mining sector. It adds:

BHP's operational performance has shown considerable resilience against current sector headwinds. While its balance sheet and dividend profiles are supportive.

Bearish points

A few bearish points for investors to consider before buying BHP shares include a potential turn in the mining cycle, M&A appetite, and cost pressures. On the first point, it commented:

Every cycle is different, and the changing of cycle phases is only usually obvious when it is in the rear vision mirror. A significant slowdown in China, combined with the risk of a global recession, should not be taken lightly, and could materially impact BHP's earnings if metal prices weaken.

And while its point about M&A activity isn't as relative now its acquisition of OZ Minerals is signed and sealed, it is food for thought for future deals. It said:

BHP may increase its offer for OZL, but there is a risk it continues to get more aggressive in layering in new growth into its business.

Finally, the broker feels investors should consider cost inflation and how that could impact its operations. It concludes:

Inflationary pressures across BHP's global business have proven volatile over the last 6 months, and may not moderate the way we had hoped, impacting margins.

Should you buy?

Based on the sum of the above and the current valuation of BHP shares, Morgans believes the risk/reward is favourable for investors.

As a result, it has given BHP shares the equivalent of a buy rating with a $50.40 price target.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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