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Zacks’ Bear Of The Day: BHP Billiton

BHP Billiton Limited (NYSE:BHP) was once riding high as commodities boomed but now that China’s economy is slowing and commodity prices have plunged, so has earnings growth. This Zacks Rank #5 (Strong Sell) is expected to see a decline in earnings this year compared to last.

Demerger to Unlock Value

BHP Billiton is one of the largest companies in the world with a market cap of $124 billion. Headquartered in Melbourne, Australia, it operates in dozens of countries in the following areas: Aluminum, Manganese, Nickel, Coal, Copper, Iron Ore, Petroleum and Potash.

In 2014, it announced it was “demerging” its businesses in order to unlock shareholder value.

A new, second company will be formed called South32. Headquartered in Perth, it will have assets in 5 countries and 24,000 employees. It’s business areas will be: Manganese, Aluminum, Silver, Nickel and Coal. South32 will generate revenue of nearly $10 billion and have minimal net debt before financing leases. BHP Billiton will remain the larger of the two companies and will hold the iron ore and the petroleum businesses, among others.

Earnings to Decline

BHP Billiton is facing declining commodity prices. Iron Ore prices fell over 40% in 2014 and most analysts don’t see much of a rebound in 2015.

China, which is the big iron ore end user, has a softening housing market and construction has slowed. Despite government stimulus programs in 2014, there’s no indication that Chinese demand will substantially rise in 2015. The analysts believe supply will outpace demand in 2015.

Copper and oil prices also fell dramatically in 2014.

Earnings are expected to fall 27% in fiscal 2015 to $3.89 per share. That’s down from $4.80 just 90 days ago. The company made $5.82 in fiscal 2014. While fiscal 2016 is expected to show a slight rebound, those estimates have been falling as well. The fiscal 2016 Zacks Consensus Estimate has fallen to $4.18 from $5.28 in the last 90 days.

Not on Sale

Shares have plunged over the last few months, alongside commodities prices, but that doesn’t mean BHP is cheap.

With commodity prices expected to fall further in 2015 and Chinese weakness persisting, BHP Billiton will likely face a slow growth environment over the next year. Even though it is trading with a forward P/E of 11.8, it’s the kind of stock I consider to be a value trap because the macro economic environment isn’t expected to improve.

If you must buy a company in the mining industry, you might want to consider Dominion Diamond (NYSE:DDC) instead. It’s a Zacks Rank #2 (Buy) and is expected to grow earnings 562% this year.

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