Factors impacting earnings estimates
Commodity producers’ earnings are sensitive to underlying commodity prices (USCI). It’s worth noting that analysts’ recommendations and target prices are based on expected forward earnings.
Previously in this series, we saw that most analysts are rating BHP Billiton (BHP) a “hold.” Any stock usually rises either with an expansion of its trading multiple or with an increase in earnings.
The day-to-day price movement is generally decided by changes in valuation multiples, while the medium- to long-term price action depends on earnings. BHP has already seen a valuation expansion this year by ~25% due to better-than-expected commodity prices and the resulting estimates for the company.
Among the other miners, Glencore (GLNCY), Southern Copper (SCCO), Teck Resources (TCK), and Freeport-McMoRan (FCX) have also seen expansions of their trading multiples after their valuation multiples fell steeply in January 2016.
The graph above shows BHP’s consensus revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) estimates. According to data compiled by Bloomberg, analysts expect BHP to deliver revenues of $32 billion for 2016, which is a decline of 38% year-over-year.
Part of this is due to the spin-off of some of its noncore assets into South32 (SOUHY). The rest is due to a general fall in commodity prices (COMT). The estimate for the company’s EBITDA is $13.8 billion. This implies an EBITDA margin of 42.7% compared to the actual margin of 41.8% for 2015.
Analysts are projecting higher EBITDA margins for the next two years, since they expect prices for commodities such as copper, aluminum, and oil to recover and stabilize.
Notably, analysts have revised BHP’s EBITDA estimates several times this year. Since the beginning of 2016, the estimate for the next four quarters of EBITDA has been revised downward by ~14%.