BHP Stock: The Under-the-Radar Growth Story in Commodities

Key Points

• Shares of BHP showed little change after the company reported its second-quarter 2024 earnings despite doubling its free cash flow.
• Secular tailwinds are present for China and India's economic recoveries and expansion, which attracted institutional capital to the stock. 
• Management gives a positive outlook on these economic tailwinds and potential demand, putting pressure on Wall Street analysts.

When investors think of commodities and their long-term demand cycles, gold and silver often come to mind as investments that can take advantage of the market's long-term upside. However, the answer to aligning a portfolio with a long-term winning commodity involves figuring out which leading economy relies on which commodity and how steady the demand could be.

Nations like China and the United States rely on commodities like iron ore to construct steel. As long as the real estate sector (residential and commercial) stays healthy in the U.S., there is a guaranteed buyer for this commodity. Looking at China, however, is where the real growth cycle could last for a decade or longer, as the country is still being built outside of real estate, infrastructure, and other foundational buildings.

Due to logistical ease and trade history, China imports a lot of these metals from Australia, so identifying an Australian exporter stock could place investors on the winning side of history. Stocks like Hecla Mining NYSE: HL and Royal Gold Inc. NASDAQ: RGLD have lots of upside behind them as oil and silver miners, but the real growth story is in Australian copper and iron ore exporter BHP Group Ltd. NYSE: BHP. Here's why.

BHP Stock's Recent Quarter Proves Why It Deserves Bullish Ratings

Shares of BHP are little changed after the company reported its second quarter 2024 earnings results, an activity which doesn't truly reflect all the benefits that investors are now facing as the company's financials expand before the final bottoming of the iron ore and copper demand cycle.

Revenues were up only 3% over the year, which isn't much to get excited about. Net income, however, could have been enough to drive the stock lower, as it contracted by 39% on the year, showing how the business is being affected by the slowing cycle today.

Noticing that the stock didn't sell off on the net income decline is enough to get investors looking deeper into the numbers to justify the price strength. They would find that the operating cash flows rose by 11% on the year to reach $20.7 billion.

Even as management decided to reinvest up to $9.3 billion into further growth and capacity initiatives, preparing for the upcycle that could be coming next, BHP's free cash flow came in at $11.9 billion, a massive jump of 111% over the year.

Any business able to expand free cash flow in this fashion has the chance to reinvest this leftover capital into growth and investor benefits like buybacks and dividends, which should command bullish ratings from Wall Street analysts. However, that's not the case for BHP stock, as analysts forecast another 4.5% decline in earnings per share (EPS) for the next 12 months.

Institutions Catch onto the Bullish Tailwinds Driving BHP Stock

While analysts may be asleep at the wheel or unwilling to risk their careers and reputations by recommending BHP stock, others on Wall Street were willing to make their bullish views on BHP stock public. Up to $955.4 million of institutional capital made its way into the company over the past 12 months.

Included in this near-billion investment flow, those at the Bank of Montreal decided to boost their stake in BHP stock by as much as 532.2% as of August 2024. This new allocation would place the bank’s net investment at $134.4 million today to deliver another vote of confidence on the company’s future.

This view may be backed by the same trends that BHP management mentioned in the company’s earnings press release. Economies like India and China are posing significant demand tailwinds in the coming quarters as their business activity and trade orders start to come back online.

Looking at China, earnings from consumer discretionary companies like Alibaba Group NYSE: BABA and PDD Holdings Inc. NASDAQ: PDD have proved that the consumer is gaining strength despite the overall economy still battling an overall downcycle. Other indicators suggest China has potentially found a bottom, such as inflation and PMI indexes.

Inflation in China has been positive for every month in 2024, which is much better than the negative inflation reported throughout 2023. More than that, the manufacturing PMI index has been expanding every month since the fourth quarter of 2023. A similar conclusion can be made in India’s economy.

Inflation has been positive and healthy throughout 2024, and the manufacturing PMI index has been running hot since January 2024. Management mentions that both India and China could represent significant demand in the coming quarters, driving the optimistic guidance that should eventually be picked up through Wall Street analyst ratings.