Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put BHP Billiton Limited BHP stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, BHP Billiton has a trailing twelve months PE ratio of 16.27, as you can see in the chart below:
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 17.88. However, if we focus on the long-term PE trend, BHP Billiton’s current PE level puts it above its midpoint of 15.21 over the past five years.
However, the stock’s PE compares unfavorably with the Basic Materials Market’s trailing twelve months PE ratio, which stands at 12.6. This indicates that the stock is quite overvalued right now, compared to its peers.
It is interesting to note that, BHP Billiton has a forward PE ratio (price relative to this year’s earnings) of 14.82, which is lower than the current level. So, it is fair to say that a bit more value-oriented path might be ahead for BHP Billiton stock in the near term.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, BHP Billiton has a P/S ratio of 2.01. This is lower than the S&P 500 average, which comes in at 3.26 right now. Also, as we can see in the chart below, this stands slightly below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, BHP Billiton currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes BHP Billiton a solid choice for value investors.
What About the Stock Overall?
Though BHP Billiton might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of C and Momentum Score of A. This gives BHP a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current year has seen one upward revision and two downward revisions in the past sixty days, while the next-year estimate has seen three upward revisions versus no downward revisions in the same time period.
This has had a positive impact on the consensus estimate as the current-year consensus estimate has shot up by 1.7% in the past two months, while the next-year estimate has risen by 4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
BHP Billiton Limited Price and Consensus
BHP Billiton Limited Price and Consensus | BHP Billiton Limited Quote
Despite this bullish trend, the stock has a Zacks Rank #3 (Hold) and it is the reason why we are looking for in-line performance from the company in the near term.
BHP Billiton is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, a strong industry rank (among Top 13% of more than 250 industries). In fact, over the past two years, the broader industry has clearly outperformed the market at large, as you can see below:
However, with a Zacks Rank #3 it is hard to get too excited about this company overall. So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.