Factors affecting 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.
The graph above shows BHP Billiton’s (BHP) consensus revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) estimates. According to data compiled from analysts’ estimates, they expect BHP to deliver revenue of $36.7 billion for 2017, a rise of 1% year-over-year.
The estimate for the company’s EBITDA is $17.2 billion, implying an EBITDA margin of 47%, compared to its actual margin of 41.8% in 2016.
Analysts project higher EBITDA margins for the next two years, as they expect the prices of commodities such as copper, aluminum, and oil to recover and stabilize.
BHP has already seen a ~25% valuation expansion in 2016 due to better-than-expected commodity prices and the resulting estimates for the company. Miners Glencore (GLNCY), Southern Copper (SCCO), Teck Resources (TCK), and Freeport-McMoRan (FCX) have also seen their trading multiples expand after their valuation multiples fell steeply in January 2016.
In the next article, we’ll discuss a recent development with regards to BHP and its petroleum assets.