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Does today’s BHP selloff make for an attractive entry point?

Tue 26 Apr 22, 12:37pm (AEST)
BHP

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Key Points

  • BHP may have been dragged down by South32’s higher cost guidance today
  • Citi has upgraded BHP to Buy from Neutral
  • Morgans believes commodity price strength continues to outweigh both covid and inflationary pressures

Despite not making any announcements today, BHP (ASX: BHP) shares were down around -5% at the open ($45.94).

While BHP may have been dragged down by South32’s (ASX: S32) higher cost guidance today, the recent pullback in commodity prices may also be weighing on the big miner’s share price.

Entry point

But given that the consensus on BHP is Moderate Buy, savvy investors may wish to contemplate whether today’s sell down makes for an attractive entry point.

While brokers didn’t do cartwheels over BHP’s quarterly update released 21 April, most broker target prices remains well head of where the stock is trading this afternoon.

Based on the brokers that cover BHP (as reported on by FN Arena) the stock is currently trading with 13.9% upside to the target of $52.26.

By comparison, based on Morningstar’s fair value of $49.85, the stock appears to be undervalued.

Down but not out

Despite not meeting expectations during the March quarter, Citi believes it’s impossible to ignore the tsunami in cash flows that producers like BHP are enjoying.

As a result, Citi has upgraded BHP to Buy from Neutral with the target price rising to $56 from $48.

The broker has upgraded price forecasts for iron ore to US$149 and US$110 per tonne respectively for this year and next, while for hard coking coal the new forecasts are US$365 and US$225 per tonne, respectively.

Meantime, Morgans believes commodity price strength continues to outweigh both covid and inflationary pressures for the company, and retains an Add rating, while the target price rises to $54.30 from $51.80.

The broker notes that while BHP is not immune to covid and inflationary pressures, the company’s position as the lowest cost iron ore miner positions its flagship WAIO business to sustain its earnings strength.

“We have updated our forecasts for guidance changes and the 3Q22 result and rolled our model forward.”

We have also lifted the lump proportion in sales and slightly trimmed inflation assumptions on WAIO unit costs to keep within guidance.”

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BHP share price movement over three months.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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