Investors Should be Digging the BHP Group Pullback

In recent history pullbacks in mining company BHP Group (NYSE:BHP) have been golden opportunities to buy—and the recent downturn is no different. The ADR has finished higher in each of the last five years presenting multiple pullbacks along the way.

After retreating from its March 3^rd peak of $81.82, BHP Group is looking attractive yet again trading in the high $60's. With global economic activity improving and commodity prices on the rise, BHP Group has the wind at its back to make a run at its all-time high of $104.59 from a decade ago.

What Does BHP Group Do?

Australia-based BHP Group is one of the world's top producers of iron ore, coal, and copper. It owns a range of low-cost mining assets around the world with low-cost being the key term here.

BHP Group's core mining business accounts for approximately 90% of revenue. Iron ore is its largest operating segment accounting for about half of sales. Copper, silver, gold, lead, zinc, nickel, uranium, and molybdenum mines round out its metal assets. It also has coal mining and potash businesses, the latter of which is used as fertilizer. Finally, the company has a side hustle in the form of oil and gas exploration and production.

So, who buys all of these materials? Well, BHP Group sells its wares directly to customers through pre-established supply agreements as well as through the global commodity exchanges. In the core iron ore businesses, global automakers, appliance manufacturers, and construction-related customers depend on BHP's iron ore supply. Interestingly, BHP Group's transportation ships can carry 47 Olympic-sized swimming pools worth of iron ore.

 What are the Growth Drivers for BHP Group?

Many companies in all sectors are expected to see sharp rebounds in their financial performancesfrom the depth of the pandemic-plagued 2020. BHP Group's outlook is particularly strong. Revenue and earnings are forecast to be up 38% and 77%, respectively in 2021 due to COVID-19 vaccine rollouts, increased industrial activity, and better commodity pricing.

Looking beyond 2021, what will keep BHP Group growing is global demand for metals, fertilizers, and energy. An important source of demand is expected to be emerging market economies like India and Brazil. As developing countries seek a higher quality of life for their citizens, investments in things like infrastructure and advanced farming methods should drive demand for iron ore, copper, and other resources.

The key business is iron ore and after an 8% increase in production during the last six months of 2020, things appear to be on an upswing. Production was particularly strong in the home market of Australia which is experiencing a sharp turnaround in industrial activity. Going forward the Australian government's plan to invest A$110 billion over the next ten year in roads, airports, and other transportation upgrades stands to be a major long-term growth driver.

Outside of the domestic market, the strong economic rebound in China is creating heavy demand for steel and by association iron ore. The same goes for copper which is needed to support the country's electric vehicle production. China, by far the world's largest copper consumer, will continue to seek out copper for EV battery and charging infrastructure. The Chinese government has required that 40% of automakers' sales come from EV's by 2030.

Technological innovation may not be the first thing that comes to mind in the mining industry but that is a big area of emphasis at BHP Group. As it continues to build out its smart technology capabilities, improved efficiencies should widen the competitive gap between BHP Group and its peers—and lead to stronger profit margins.

 Is BHP Group Stock Undervalued?

Dividend investors will appreciate BHP Group's roughly $4 annual dividend which presently equates to a dividend yield close to 6%. And despite the big bounce off the March 2020 low, BHP Group shares remain inexpensive at 11x forward earnings. Historically, the stock has traded in the range of 8x to 15x earnings.

How does it stack up versus the broader S&P 500 benchmark? According to Birinyi Associates, the current forward P/E ratio of the S&P is around 22x. So, BHP Group shares can be had for about half this valuation. This is a good price to pay for a company with multiple long-term growth drivers. 

As far as the technical analysis, BHP Group stock has been recording higher highs and higher lows dating back to its pandemic low. This is a bullish pattern that suggests the longer-term uptrend continues.

Whenever a low-cost producer regardless of industry has emerging growth prospects investors should take notice. This is certainly the case with BHP Group which should play a vital role in supplying iron ore, copper, and more for global infrastructure and EV projects. Investors should be digging BHP Group as a long-term core holding.

Analysts Ratings

BHP has been the subject of several recent analyst reports. BMO Capital Markets reaffirmed a "market perform" rating on shares of BHP Group in a research note on Wednesday, February 17th. Argus raised BHP Group from a "hold" rating to a "buy" rating in a research note on Monday, March 15th. Liberum Capital cut BHP Group from a "hold" rating to a "sell" rating in a research note on Tuesday, February 2nd. Royal Bank of Canada reaffirmed an "outperform" rating on shares of BHP Group in a research note on Friday, January 22nd. Finally, Credit Suisse Group cut BHP Group from an "outperform" rating to a "neutral" rating in a research note on Tuesday, February 2nd. One equities research analyst has rated the stock with a sell rating, eight have issued a hold rating and nine have given a buy rating to the company's stock. BHP Group has an average rating of "Hold" and a consensus target price of $77.00.

The company has a quick ratio of 1.17, a current ratio of 1.45 and a debt-to-equity ratio of 0.42. The stock has a 50 day simple moving average of $73.07 and a 200 day simple moving average of $62.13. The stock has a market cap of $110.96 billion, a price-to-earnings ratio of 19.20, a PEG ratio of 2.98 and a beta of 1.02.

The business also recently announced a semi-annual dividend, which will be paid on Tuesday, March 23rd. Stockholders of record on Friday, March 5th will be issued a $2.02 dividend. This represents a dividend yield of 3.2%. The ex-dividend date is Thursday, March 4th. This is a positive change from BHP Group's previous semi-annual dividend of $1.10. BHP Group's dividend payout ratio (DPR) is currently 112.85%.

About BHP Group (NYSE:BHP)

BHP Group engages in the natural resources business in Australia, Europe, China, Japan, India, South Korea, rest of Asia, North America, South America, and internationally. It operates through Petroleum, Copper, Iron Ore, and Coal segments. The company engages in the exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal.

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