BHP margins and P/E
Posted on 28 October 2009
Got asked as to why I thought that the commodities sector “is trading at high historical valuations with expanded profit margins” (article from yesterday but for completeness it’s here)…well, using BHP as a proxy consider the following charts:
BHP has been enjoying the high life for a number of years now – the lean years following the Asian crisis are dim memory. Now looking at how this translates into operating performance and valuation, following is a chart of EPS and the share price since 2000:
And finally, contrasting these (rolled together as an average annual P/E as a rough guide) with operating margins:
Looks suspiciously like:
1) Earnings peaked in 2007/2008 – operating margins have been contracting which is consistent with lower commodities prices while maintaining sales volumes
2) The share price has not kept pace with the decline in earnings, leading to an expansion in the P/E ratio – somewhat counter-intuitive in an environment where risk has been repriced (even after the ‘we love credit’ rally of the last 6 months).
QED?
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[...] one metric that keeps coming up is the 40% EBIT margin. I have discussed it before as something that should prove hard to maintain. BHP makes the claim that their strategy has [...]
[...] one metric that keeps coming up is the 40% EBIT margin. I have discussed it before as something that should prove hard to maintain. BHP makes the claim that their strategy has [...]