BHP Group shares: what to expect from annual results

While BHP faces challenges in its key iron ore and oil divisions, the low valuation, strong dividend and compelling chart provide a bullish outlook for the global miner.

When is BHP’s earnings date?

BHP reports earnings on 20 August, covering its financial year.

BHP earnings – what does the City expect?

BHP is expected to report earnings per share (EPS) of $1.91, up 13.7% year-on-year (YoY), while revenue is expected to be up 2.1% at $44.55 billion. Pre-tax profit is forecast to fall to $16.49 billion, down from $18.18 billion a year earlier.

Unsurprisingly, BHP shares have taken a hit as the iron ore price has fallen. The shares had rallied from the end of 2018 until July, moving above £20 and hitting their highest level since early 2013. However, this pullback comes after a strong run for both BHP and the iron ore price. The iron ore market had moved further into deficit, with demand outpacing supply, helping to support prices. However, the longer-term outlook for the metal seems unclear, with steel production in China likely to peak over the next decade.

Almost inevitably, supply began to rise in order to meet demand, helping to curb the rise in prices. The fall in prices helps to undermine some of the positive case for BHP in the short term. In addition, the firm has struggled with costs to meet one-off problems, such as the derailed train in Australia, a fire in a nickel smelter and another fire in Chile all hit performance, while the need to increase protection against flooding in its Brazil operations has also reduced headline profit figures.

BHP’s other big asset is oil. While this helps to reduce its dependence on iron ore prices, oil has not been an easy place to do business recently. Despite the Organisation of the Petroleum Exporting Countries' (OPEC's) attempts to curb production, continued US shale production has weighed on the price, and even the increase in US-Iran tensions has done little for the price. BHP will have to explain how it plans to deal with lower income from this division.

However, with much of the bad news already in the price BHP may begin to recover. In addition, H2 has seen better performance, boosting hopes that dividend payouts may be increased. Debt continues to fall, with the pile down to the $10 billion-$15 billion range. In a world of falling bond yields, the 5% yield is an attractive one, and is still covered by earnings.

Despite the rise in the price, BHP still remains relatively inexpensive, at 9.7 times forward earnings versus a five-year average of 17. Trade wars and weak economic growth could hit performance, but at present it seems that BHP shares are not pricing in too much good news.

How to trade BHP earnings

The average move on results day for BHP is 2.06%. This compares well with the current 14-day average true range of 2.03%. Volatility in the share price has been climbing since May, when the 14-day average true range stood at 30, to a peak of 46 in early August.

Of 29 analysts covering the firm, only four have ‘buy’ recommendations, while there are five ‘sells’ and twenty ‘holds’. This cautious sentiment reflects the substantial rally in the price. The current target price is £19.42, an 8% premium to the current share price.

BHP share price: technical analysis

BHP has been steadily gaining since the middle of 2017, when the share price began to rally from £10.60. Aside from some weakness in late 2018, the price continues to record higher highs and higher lows. The most recent pullback has found support at the 200-day simple moving average (SMA) of £17.66, and remains above the rising trendline from the 2017 lows. A continuation of the rally would see the price move back towards £20 and higher, with a higher high for the current uptrend moving above the July peak at £20.79.

The positive view of the share price remains firmly in place unless the price moves below £17.50, as this would put the price below the 200-day SMA for the first time since late January. Even then, this may not be a substantially bearish view, since the price moved below this in H2 2018 before recovering. However, this time the price would also fall below trendline support, reinforcing the bearish view.

BHP looks strong despite challenges

Increased costs and potential falls in revenue in its key iron ore and oil divisions could well imperil the ongoing rally in BHP shares. However, the relatively low valuation suggests that the market is content with the current outlook, and with a 5% yield investors will likely remain bullish on BHP on a fundamental basis.

Technically, the shares have been strong performers, outpacing the FTSE 100 over the past year and since 1 January. A strong update for the full year may well reinvigorate the uptrend, brightening the outlook for BHP shares in the near term.

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