A spike in bond yields, as the outlook for the US economy brightens, has the stockmarket bulls very excited about BHP Billiton. Broker Southern Cross Equities has slapped a $60 price target on the stock that is up 4.43 per cent so far this year. The broker believes the miner is receiving record prices for copper, silver and iron ore, while coking coal prices - where it is the largest supplier to the seaborne market - are also tipped to rise.
If that's not enough, SCE thinks oil prices are heading back to US$100 a barrel, while bauxite and manganese prices are also moving north. Uranium prices are also on the march. At the same time production is growing, implying the stock is going to enjoy record production with record prices - it doesn't get much better than that.
It all adds up to BHP Billiton generating huge cash flow, which is being used somewhat sparingly in a buyback of its heavily discounted shares in Britain.
With BHP expected to be debt-free by the end of this year, the market is struggling to see how it can avoid returning even more cash to shareholders, barring a major deal.
The company has outlined plans to spend US$15 billion on growth projects this financial year but has not provided details on which are the most likely to be approved by the end of June.
Analysts' forecasts for this financial year and next continue to rise as they try to play "catch-up" to rising commodity prices.
At the moment consensus earnings-per-share forecasts for BHP in 2011 are US$3.74 and 2012 US$4.32.
That puts BHP on a forward price-earnings ratio of about 10.5 times.
Southern Cross says that is way too low for a company that will grow its earnings at more than 50 per cent in the next two years. The bears may say that earnings are "peak cycle" and so the P/E should contract to reflect that but if commodity prices continue to rise and investors continue to ditch government bonds and seek out risky assets, then stocks such as BHP will get a boost.
Souther Cross says there "isn't enough skilled labour or equipment in the world for a meaningful supply response by 2012, with analyst supply estimates in most commodities way too optimistic in terms of time, cash cost and volume".
They argue that in 2012 earnings per share will be around US$5 a share and, based on the stock's long-run P/E of 12 times, it puts the share price at $60.
Source THE AUSTRALIAN FINANCIAL REVIEW
