Over the last five years, the share price performance of BHP Billiton (LSE: BLT) (NYSE: BBL.US) has disappointed. Indeed, shares in the mining company are currently up 35% in five years, while the FTSE 100 is up 62% over the same time period. Despite lagging the recovery, though, BHP Billiton could prove to be a star performer in future. Here’s why.
Emerging Market Growth Isn’t Over Just Yet
With China’s first quarter GDP growth numbers being slightly below target (7.4% annualised versus a target of 7.5% annualised), many commentators are becoming concerned at the sustainability of emerging market growth. However, there are a couple of key points to make. Firstly, China does not encompass the totality of emerging markets, with countries such as India, Brazil and others across Asia, Latin America, Africa and Eastern Europe also ’emerging’. Therefore, a small fall in the growth rate of the Chinese economy, although significant, is not the full story.
Secondly, the 7.4% growth rate in China is still vastly superior to anything experienced in the developed world. So, companies that are focused in China and across the developing world (of which BHP Billiton is one) could be well-placed to benefit from relatively strong rates of growth in future.
A Sound Strategy
BHP Billiton, realising that growth could come under pressure over the short to medium term, has mothballed various projects. This is very prudent and shows that company management has a clear focus on costs and on maintaining profitability, as opposed to simply seeking top-line growth at the expense of profits. This strategy, although with pain in the short run, means that BHP Billiton is on a much stronger footing over the medium to long term, as it is not incurring unnecessary costs associated with new projects.
Looking Ahead
Clearly, earnings figures over the last couple of years have disappointed, with earnings per share (EPS) falling by 18% in 2012 and 31% in 2013. However, EPS is set to increase by 21% this year and, despite this, BHP Billiton trades on a price to earnings (P/E) ratio of just 12.1. This compares favourably to the FTSE 100’s P/E of 13.3 and, when the aforementioned emerging market prospects and sound strategy are taken into account, it means that BHP Billiton could turn out to be a star performer.