How BHP Billiton Measures up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today I am looking at BHP Billiton  (LSE: BLT  ) (NYSE: BBL  ) to see how it measures up.

What are BHP Billiton's earnings expected to do?

 

2013

2014

EPS Growth

(28)%

21%

P/E Ratio

11.8

9.7

PEG Ratio

n/a

0.5

Source: Digital Look

BHP Billiton is expected by City analysts to follow last year's 18% earnings per share decline with another heavy loss in the year ending June 2013. However, earnings are expected to bounce back strongly in 2014.

The mining giant's expected earnings dip this year results in an invalid PEG rating, although next year's recovery brings the measure back into value territory below 1. In addition, the firm's price-to-earnings (P/E) ratio for this year remains above the benchmark of 10 for 2013 -- any reading below this is considered sterling value. The P/E rating is forecast to fall underneath 10 in 2014, however.

Does BHP Billiton provide decent value against its rivals?

 

FTSE 100

Mining

Prospective P/E Ratio

14.9

12.4

Prospective PEG Ratio

4.5

0.6

Source: Digital Look

BHP Billiton's invalid PEG rating in the current year reflects its poorer growth prospects versus both the FTSE 100 and wider mining sector. The company's P/E readout is lower than both of these groups, although this reflects the firm's weaker near term earnings outlook.

Risky materials play demands a steely disposition
BHP Billiton, like all mining plays, is highly susceptible to any hiccups in the global economy and subsequent demand for natural resources. For example, the firm said last month that it expects the crucial metallurgical coal market to remain "comfortably supplied in the near term."

Latest steel production data from natural resources glutton China showed total crude output fall almost 4% in the ten days to May 31 from the preceding week-and-a-half, casting further doubt over future raw material off-take. Indeed, the company faces the prospect of worsening supply and demand balances across a number of its key markets in coming years, particularly in the iron ore market where the firm derives more than a third of revenues.

BHP Billiton has initiated a massive transformation plan in order to slash costs and shore up the balance sheet amid ongoing geofinancial uncertainty. The company's diversification across myriad markets could pay off should the economic recovery head higher, although fears of any slowdown and thus resources uptake could whack earnings forecasts.

Dig for treasure with the Fool
As I have explained, BHP Billiton comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a 'hit and miss' business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

To help you avoid these potential pitfalls, The Motley Fool's "How To Unearth Great Oil & Gas Shares" report gives an expert view on how to make a fortune from what lies under our feet. Click here now to download our report -- it's 100% free and comes with no further obligation.

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