It was a rollercoaster ride for BHP Billiton Ltd (ASX:BHP) in 2013! Capital expansion projects were put on the shelf, uncertainty around mining and carbon taxes and which government would be elected, as well as big swings in the outlook for Chinese growth created large price swings throughout the year. A firm start to the year quickly evaporated and sent a $39.34 stock tumbling to $30.57 within 2 months.
For loyalist shareholders however, 2013 was a great year for BHP when it came to dividends. Not only were the dividends lifted by almost 14c (13%) from 2012 to 2013, but they also posted as the biggest payout ratio (percentage of the total earnings paid to shareholders) for BHP over the last 10yrs. Keeping this in mind, we do not expect to see further large dividend increases in 2014.
McKenzie… a new leader at the helm!
With the changeover in leadership in May, new CEO Andrew McKenzie quickly ushered in change to the Group Management Committee structure consolidating the business into 5 groups whilst also steering the company towards improving efficiency and productivity. We expect this will likely be a key focus for 2014, so we’re not expecting to see announcements of new major projects or expansions.
2013 Iron Ore prices beat everyone’s expectations!
One of the biggest surprises for 2013 was the strength in Iron Ore prices. Looking back to January 2013, a Reuters Poll of 17 analysts suggested that the average expected price for Iron Ore throughout 2013 would be US$125. At the same time, the average analyst expectation was for Iron Ore by 2015 was only US$100. Given prices had reached as high as 158.50 on Jan 8th, these predictions were pretty dire.
As recently as October however, these estimates were revised higher and now sit at a US$134 average price in 2013 and US$135 average in 2014. Such upward revisions were also seen on commodities like Crude Oil as data showed China growing faster than expected. It was this gradual realisation for the market throughout the year that really helped picked BHP up from off the canvas. At the worst levels in 2013, prices had bottomed out as low as mid $30’s, down roughly 18.7% from the start of the year.
Has optimism for China recovery already been priced into BHP?
Going into 2014 we expect to see lows formed and to act as a base early in the year. Coming into the end of 2013 momentum has been decisively bearish, causing stock price falls from $38.27 to mid $35’s. There could still be some momentum left on the downside, however we do then expect to see prices heading higher towards our 2014 target range of $38 to $39.
Looking into the valuation metrics for BHP, which we know price can and will deviate from during the year, we expect a fully priced BHP trades between 18 and 20 times its earnings, giving us an average price of $41.80. On average over the last 10 years however, an average value of 15 times earnings prices BHP at $33 and a more reasonable point for long-term accumulation. This is also based on no improvement in EPS during 2014, and therefore any improved profits will push these best and average case price targets even higher.
In last year’s predictions, we had a $33/$35 range for our outlook. Interestingly using the 250 day average as a benchmark, the average price for 2013 is currently $35.40 – in short, we were bang on the money – not only from a forecast but also from a trading perspective, with several successful trades on the stock, already in the bag.
BHP Billiton Ltd Stock Forecast 2014
Just like 2013 we have selected a range target because it is in line with historic price behaviour for BHP. BHP is the type of stock that likes to get comfy in $2 ranges and so therefore is also a great range trading stock. Therefore when we see $3 plus moves up or down within short periods, this also highlights reversal opportunities.
These price targets mean any that we will be on the lookout for sustained periods of weakness, say 1-2 months of selling, as representing a good opportunity for buyers to get involved. If we move closer to our $40 targets, we will also be ready to start selling into rallies or even establishing new bearish trades as we had done with BHP higher than $37.50 this year.
What about FMG?
BHP’s partners in crime, Fortescue Metals Group (ASX:FMG) and Rio Tinto Group (ASX:RIO), have also had a rough, choppy year in 2013. FMG however became the market darling over the second half of 2013, posting spectacular price rises alongside the company’s leveraged exposure to iron ore prices. While FMG seems to remains the active traders’ preference, BHP remains our choice for investment strategies due to the company’s diversified lower risk business model. That said, we have had several trades on FMG this year and will continue to target income producing opportunities for those with the appetite for that stock’s risk profile.
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