BHP Group Stock Shows Every Sign Of Being Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of BHP Group (NYSE:BHP, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $67.53 per share and the market cap of $169.7 billion, BHP Group stock is estimated to be fairly valued. GF Value for BHP Group is shown in the chart below.


BHP Group Stock Shows Every Sign Of Being Fairly Valued
BHP Group Stock Shows Every Sign Of Being Fairly Valued

Because BHP Group is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 11.5% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. BHP Group has a cash-to-debt ratio of 0.42, which is worse than 79% of the companies in Metals & Mining industry. GuruFocus ranks the overall financial strength of BHP Group at 5 out of 10, which indicates that the financial strength of BHP Group is fair. This is the debt and cash of BHP Group over the past years:

BHP Group Stock Shows Every Sign Of Being Fairly Valued
BHP Group Stock Shows Every Sign Of Being Fairly Valued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. BHP Group has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $46.3 billion and earnings of $2.75 a share. Its operating margin of 33.20% better than 89% of the companies in Metals & Mining industry. Overall, GuruFocus ranks BHP Group's profitability as strong. This is the revenue and net income of BHP Group over the past years:

BHP Group Stock Shows Every Sign Of Being Fairly Valued
BHP Group Stock Shows Every Sign Of Being Fairly Valued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. BHP Group's 3-year average revenue growth rate is better than 72% of the companies in Metals & Mining industry%. BHP Group's 3-year average EBITDA growth rate is 8.7%, which ranks in the middle range of the companies in Metals & Mining industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, BHP Group's return on invested capital is 9.70, and its cost of capital is 6.54. The historical ROIC vs WACC comparison of BHP Group is shown below:

BHP Group Stock Shows Every Sign Of Being Fairly Valued
BHP Group Stock Shows Every Sign Of Being Fairly Valued

To conclude, the stock of BHP Group (NYSE:BHP, 30-year Financials)gives every indication of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about BHP Group stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.

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