Expanding Copper Production And Potash Entry Will Diversify Portfolio, But Analysts Forecast Earnings Decline

Key Takeaways

• Operational excellence and cost discipline help BHP maintain strong margins, positively impacting earnings.
  
• Expansion into potash diversifies revenue sources, increasing earnings and stability.
  
• Economic uncertainties, labor market pressures, and financial obligations from the Samarco dam failure present significant risks to BHP's future cash flows and financial stability.

Catalysts

Operates as a resources company in Australia, Europe, China, Japan, India, South Korea, the rest of Asia, North America, South America, and internationally.

• BHP's copper production is expected to grow by 24% over a three-year period, with significant investments in expanding operations such as the Laguna Seca concentrator and new projects in Argentina. This is likely to increase future revenue.
  
• The ongoing focus on operational excellence and cost discipline contributes to BHP maintaining industry-leading margins, which should positively impact net margins and earnings.
  
• BHP's entry into the potash market with the Jansen project diversifies its portfolio and positions it in a high-demand commodity with expected strong free cash flow, impacting revenue and earnings stability.
  
• Strategic joint ventures, such as the Vicuña project in Argentina, could enhance BHP's copper output, increasing revenue from this critical mineral in the future.
  
• The reconciliation agreement related to the Samarco dam failure provides greater certainty over cash flows and liability management, potentially improving future net earnings stability.

BHP Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BHP Group's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.1% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $10.6 billion (and earnings per share of $2.06) by about March 2028, down from $11.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $11.7 billion in earnings, and the most bearish expecting $8.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, up from 11.2x today. This future PE is greater than the current PE for the US Metals and Mining industry at 11.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

BHP Group Future Earnings Per Share Growth

Risks

• The agreement related to the Samarco dam failure involves significant financial obligations for BHP Brazil, along with the potential for continuing liabilities, which may impact future cash flows and net margins.
  
• Sustained tightness in the labor market and slowly adjusting labor costs could continue to put upward pressure on operating expenses, affecting net margins adversely.
  
• The 11% decline in EBITDA attributed to external drivers, mainly due to a significant drop in prices for iron ore and steelmaking coal by over 20%, poses a risk to revenues if commodity prices remain volatile or decrease further.
  
• Despite progressing with growth projects, the potential for ongoing volatility and uncertainty in global economic conditions, especially regarding inflation and trade policies, could impact demand for commodities and thus, future revenues and earnings.
  
• The potential increase in net debt to around the top end of the target range by the end of the financial year introduces risk factors related to interest rates and financial flexibility, which could affect earnings and cash flows.

Valuation

• The analysts have a consensus price target of A$44.42 for BHP Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$48.22, and the most bearish reporting a price target of just A$39.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $49.9 billion, earnings will come to $10.6 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$39.56, the analyst price target of A$44.42 is 10.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.