Trade idea: Short-term trading BHP

Overall, BHP’s fourth quarter production result was solid and in line with consensus. Production forecasts in iron ore, petroleum and copper were maintained and output in the quarter was solid, coming in above company estimates but below consensus estimates.

Source: Bloomberg

Prices had declined as expected. However, capex cuts, cuts to rig utilisation and some write-downs will maintain BHP Billiton’s cash position, leaving its current dividend and shareholder return programs intact.

The key numbers:

12-month forward PE estimate: 13.5x – Current P/E 8.99x

Estimated earnings per share in FY15: US$2.06

Dividend growth in 2015: 5.4% to US$1.26

12-month high $39.79 – 12-month low $26.50

The potential trade:

If you crudely extrapolate the forward-blended P/E to the forecasted EPS, it’s not hard to see BHP reaching a target price of A$32.40. I think investors are willing to pay for this despite the concerns around commodities, as BHP will want to keep up with rival Rio Tinto and appease shareholders through returns.

I think a likely short-term trade for BHP involves it rallying back to first resistance levels at $30.74. The momentum over the past few days suggests BHP is likely to see it test this level quickly and riding the rise would be advantageous. There is very strong support at $26.90 and it was bid up solidly when it was broken. I would be looking to put a stop at the yearly low of $26.50 to mitigate risk. I would look to put a limit at $32.40 and then reassess entering the stock on a suspected pull back from this level. 

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