Wednesday, 6 February 2008

BHP Kicks Off Earnings Season With A Whimper

BHP (BHP) kicked off 1H08 reporting season for Australian companies with a lackluster result. The company reported Net Profit of US$6.02 billion for the six months to December 31st 2007, representing a -2.8% decline from the previous period and the company's first profit drop in 5 years.

The result missed analyst forecasts by a wide margin. Forecasts had ranged from between $US6.3 billion to $US7.75 billion. Earnings per share grew by an uninspiring 2.8% due to a reduction in the number of shares outstanding via buybacks. The company cited exchange rate pressures and higher input costs as impacting the result.

The company increased it's dividend by 45% to 29 cents per share however investors don't buy BHP for yield, they buy for growth and they have been disappointed on that score.

The financial report has been overshadowed by the company's recent bid for rival Rio Tinto (RIO). BHP along with other mining companies is looking vulnerable. They risk overpaying for RIO at the peak of the cycle, when commodity prices look set to come under pressure as a result of slowing global demand for raw materials.

With the stellar performance of mining shares and commodity prices over recent years investors can easily forget that mining companies are highly cyclical and subject to volatile commodity price movements.

From my perspective the risks are clearly to the downside. The positives such as the over-hyped Chindia factor are priced in but potential negatives such as a precipitous drop in commodity prices are yet to be factored in. Even after a -7% decline in the share price today there is little reward to be found for taking on an increasingly risky position in BHP at current prices.