Does BHP Offer a Hidden Opportunity After Year-to-Date 4.5% Gain?

• Ever wondered if BHP Group is a hidden bargain or just priced for what it is? You’re not alone. Knowing whether now is the right time to buy can make all the difference.
• BHP’s stock closed most recently at $41.74, with returns steady at 0.0% over the past week and recording a solid 4.5% gain year-to-date. This suggests both resilience and investor interest even after some short-term declines.
• Recent headlines have highlighted global commodity volatility and ongoing debates about mining’s role in the energy transition. Both developments have influenced how investors perceive BHP’s growth prospects and risk factors. For example, renewed discussions around resource nationalism and sustainability in mining have kept the spotlight firmly on industry leaders like BHP.
• When examining valuation, BHP Group scores a 4 out of 6 on our valuation checklist. This indicates it is undervalued in most, but not all, key areas. We will break down the different ways to value BHP next, and at the end, we will show how to get a fuller picture of what the numbers may mean for you.

Find out why BHP Group's 8.7% return over the last year is lagging behind its peers.

Approach 1: BHP Group Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company's value by projecting its future cash flows and discounting them back to today's value. This method provides an informed estimate of what the business could be worth right now, taking into account long-term growth prospects and risk.

BHP Group currently generates $10.35 billion in free cash flow, with forecasts from analysts projecting this figure to increase modestly in the coming years. By 2030, the company's free cash flow is expected to reach about $10.23 billion, based on a combination of near-term analyst predictions and longer-range extrapolations.

Based on these projections, the DCF model places BHP Group’s intrinsic value at $47.75 per share. Compared to the current share price of $41.74, this suggests the stock is trading at a 12.6% discount, so the market price is below what the business may actually be worth.

For investors, this signals an opportunity: based on cash flow fundamentals, BHP Group appears undervalued relative to its intrinsic value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests BHP Group is undervalued by 12.6%. Track this in your watchlist or portfolio, or discover 926 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for BHP Group.

Approach 2: BHP Group Price vs Earnings

The price-to-earnings (PE) ratio is a widely used metric to value profitable companies like BHP Group. It allows investors to measure how much they are paying for each dollar of the company's earnings. For businesses with consistent profits, the PE ratio offers a straightforward way to compare valuations across companies, industries, and over time.

What counts as a "normal" or "fair" PE ratio depends on several factors, including a company's growth expectations and perceived risks. Higher growth firms or those facing fewer risks typically command higher PE ratios, since investors are willing to pay more for future earnings potential. Conversely, slower-growth or riskier companies tend to trade at lower multiples.

BHP Group currently trades at a PE ratio of 15.3x. This is well below the Metals and Mining industry average of 22.3x and also lower than the average of its peers at 19.8x. At first glance, this might suggest BHP is undervalued relative to rivals in its sector, but PE ratios do not account for all company-specific factors.

That is where Simply Wall St's “Fair Ratio” comes in. The Fair Ratio, calculated at 25.4x for BHP, is a proprietary metric incorporating not just industry or peer averages but also earnings growth, profit margins, market cap, and specific risk factors. This approach offers a more tailored and holistic benchmark for what BHP’s true PE ratio should be, rather than relying solely on broad comparisons.

Comparing BHP’s actual PE of 15.3x to its Fair Ratio of 25.4x points to a significant discount. This indicates that BHP’s current price is below what a reasonably informed investor might expect, given its specific outlook and risk profile.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1432 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your BHP Group Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a simple but powerful tool that allows you to tell your own story for a company by bringing together your outlook on its future revenue, earnings, margins, and fair value. Instead of just relying on numbers, Narratives help you connect your personal perspective or expectations, such as trends in decarbonization, market expansion, or operational challenges, to a financial forecast and then directly link that to a fair value estimate for BHP Group.

On Simply Wall St’s Community page, Narratives are accessible for anyone to use, helping millions of investors make decisions grounded in their unique insights. When you create or follow a Narrative, you can clearly see how your fair value compares with the current market price, highlighting opportunities to buy, hold, or sell based on your convictions. Narratives also update dynamically whenever new news or financial results are released. This means your investment thesis is always built on the latest information.

For example, one Narrative for BHP Group assumes revenue will gradually decrease over the next three years and expects a fair value of A$35.82. Another predicts resilient demand and margin expansion, generating a bullish fair value of A$46.55. Narratives empower you to decide which story and which forecast fits your view best.

Do you think there's more to the story for BHP Group? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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