BHP Billiton: A Look Down Under
02/10/2006 12:00 am EST
"Australia is the safest and best way to play the boom in China and commodities over the next decade" says Steve Sjuggerud. Here, the editor of True Wealth looks at BHP Billiton—Australia’s "biggest and best commodity company and a super-cheap stock."
"Right now, the action is in commodities. China wants ‘em, and Australia has ‘em. Not only does Australia have the commodities, it’s a safe and stable place to do business, and it’s right on China and India’s doorstep. Since I don’t want to risk any more than I have to, the China-Australia commodity connection is exactly what we want. I think that most investors are seriously under-estimating the potential gains here. In short, over the next decade, it could be good for hundreds of percent returns.
"People are starting to catch onto the fact that large developing countries like China and India have an insatiable appetite for commodities. What isn’t understood is just how high commodity prices can really go. Commodity prices in general are up 80% since 1999 (as measured by the CRB Index) and gold is at 25-year highs.
"But unlike stocks, the average investor hasn’t bought in yet. That tells me there’s still plenty of upside. We’re nowhere near a NASDAQ-style peak in commodities yet. I strongly believe that we are in a major commodity bull market, and it could last for many more years. There’ll be ups and downs in commodities, of course. Some of these moves will be violent. But the trend is up, and I expect it will stay that way.
"Specifically, Western Australia is where the commodities are that the Chinese and Indians want. You can think of it as the Saudi Arabia of commodities. The best play on this trend is a company based in Australia— BHP Billiton (BHP NYSE), which is the biggest commodity company in the world. Its market value (when you add together it’s Australian and UK listed shares) is roughly $100 billion.
"BHP is the world leader in many commodities Its growing importance to China shows in its numbers. Sales for the entire fiscal year of 2002 to China were only $371 million. In the first six months alone of 2005, sales to China were $2.4 billion. Talk about sales growth. As you might have expected, steel-making materials were the top seller to China, followed by base metals.
"The stock is trading at 12 times estimated earnings for the year ending June 2006. To me, this is super-cheap. The reason it’s so cheap is that the analysts don’t believe in a commodities bull market. I try not to predict the future. Even if commodity prices simply stay the same, you’ll do well in BHP. It will do fantastically better than the analysts are expecting. Even if China busts, we’re still buying into BHP at a cheap enough price that we won’t get hurt.
"China needs commodities, and BHP has them. And it’ll likely be this way for the next decade.Buy BHP Billiton now and use a 25% trailing stop. I hope we can weather the downturns in commodity prices along the way, and own this for a very long time. If we’re right about China and commodities, this should be good for a few hundred percent gains in that time."