Has BHP Billiton Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether BHP Billiton (NYSE: BHP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at BHP Billiton.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.4%

Fail

 

1-year revenue growth > 12%

(10.8%)

Fail

Margins

Gross margin > 35%

76.2%

Pass

 

Net margin > 15%

14.3%

Fail

Balance sheet

Debt to equity < 50%

52%

Fail

 

Current ratio > 1.3

1.13

Fail

Opportunities

Return on equity > 15%

14.6%

Fail

Valuation

Normalized P/E < 20

14.51

Pass

Dividends

Current yield > 2%

3.1%

Pass

 

5-year dividend growth > 10%

15.3%

Pass

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at BHP Billiton last year, the company has plunged by four points, with falling revenue, net margins, and returns on equity combining with a rising debt-to-equity ratio. The stock hasn't performed nearly as badly, but it has still posted a small loss over the past year.

As the world's largest mining company, BHP Billiton has gotten hit especially hard by the drop in demand for the many commodities that it produces. In particular, low prices for iron ore and metallurgical coal were major culprits in the company's 48% drop in net operating cash flow during the second half of 2012.

Yet BHP managed to avoid some of the miscues that its competitors made simply by not trying to get any larger than it already is. By contrast, Rio Tinto's (NYSE: RIO  ) acquisition of Alcan seemed like a wise buy at the time, but the weakness in the aluminum market has forced the company to take massive impairment charges. Similarly, ill-advised acquisition activity from Cliffs Natural Resources (NYSE: CLF  ) led it to slash its dividend by more than 75% last month, with its concentration on met-coal and iron ore weighing on the company's results. Because of its prudent capital management, BHP was able to raise its dividend last month.

Another thing that has helped BHP shine is its energy exposure. With substantial oil and natural gas assets, BHP isn't as vulnerable to the whims of the metals markets as more concentrated miners. The strategy has been successful enough to inspire Freeport-McMoRan (NYSE: FCX  ) to take the same tack with its plans to acquire two energy-related companies.

For BHP to improve, it needs a global recovery in metals and energy prices to help it boost its revenue. Until then, BHP can take advantage of its superior capital position to grab up assets on the cheap and put itself in better position to reap profits during the next cyclical upturn.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

BHP has avoided the fate of Cliffs Natural, which has underwhelmed investors lately after its dramatic 76% dividend cut in February. However, it could now be looked at as a possible value play because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's premium research report on the company.

Click here to add BHP Billiton to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2316982, ~/Articles/ArticleHandler.aspx, 12/22/2014 10:48:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,896.41 91.61 0.51%
S&P 500 2,072.51 1.86 0.09%
NASD 4,775.39 10.01 0.21%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/22/2014 10:33 AM
BHP $47.57 Down -0.82 -1.69%
BHP Billiton Limit… CAPS Rating: ***
CLF $6.31 Down -0.38 -5.68%
Cliffs Natural Res… CAPS Rating: ***
FCX $22.83 Down -0.57 -2.44%
Freeport-McMoRan C… CAPS Rating: ****
RIO $44.63 Down -0.75 -1.65%
Rio Tinto plc (ADR… CAPS Rating: ***

Advertisement