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Wednesday, February 10, 2010

Bloody huge profits (BHP)

BHP Billiton (BHP) announced its first-half results this morning. They are quite a bit better than expected: net profit of $US6.14bn ($US5.7bn excluding significant items) compared to the $US5.1bn analysts expected. They also declared a US42c dividend, up from US41c.

The shares went from yesterday's closing price of $39.85 to $41.24 in early-morning trading but are currently around $40.15, up a mere 0.75% whereas its rival RIO put on over 2%. As Professor Julius Sumner Miller used to ask, "Why is it so?"

Big increases in production volumes combined with the sharp rebound in commodity prices and demand towards the end of last year will translate into a large increase in BHP’s profitability and cash flows this half-year and, despite its reservations about the health of developed economies and the maintenance of China’s demand in the near term, the group remains very confident about the longterm outlook.

BHP Billiton believes with a passion in the long-term China and India stories and that the slow-down in global mineral expansion projects which took place in 2007 will lead to supply shortages in the medium term. BHP Billiton has found that the diversity of its mineral sources insulates it from the worst of downturns because normally there are at least one or two products doing well. The company has virtually no debt with its nominal net debt of around $8 billion being well under 10 per cent of market capitalisation.

BHP closed the day at $39.88. My target price is $44.

And here's something to ponder:

"IN THE STOCK MARKET (as in much of life), the beginning of wisdom is admitting your ignorance. One of the many things you cannot know about stocks is exactly when they will up or go down. Over the long term, stocks generally rise at a nice pace. History shows they double in value every seven years or so. But in the short term, stocks are just plain wild. Over periods of days, weeks and months, no one has any idea what they will do. Still, nearly all investors think they are smart enough to divine such short-term movements. This hubris frequently gets them into trouble."

James K. Glassman, Co-Author of Dow 36,000