Is Bhp Safe? Don't Look For Answers In The Earnings Forecast

The Age

Saturday March 5, 2005

MARCUS PADLEY

HERE'S a dinner party conundrum. What goes up in price but gets cheaper? The answer? BHP Billiton. In the past year it's got 50 per cent more expensive and 25 per cent cheaper at the same time. Its share price went up more than 50 per cent while its price-earnings ratio fell 25 per cent.

The culprit is, of course, earnings forecasts. They've gone up more than the share price, which tells you that forecasts aren't reliable. Two years ago brokers were using a $US20 oil price assumption. It's now $US53. They thought copper and nickel prices were going nowhere for two years. They doubled. In the past year alone, coal prices rose 120 per cent, iron ore prices 71.5 per cent. No one knew this was going to happen. In fact, if BHP analysts had forecast a 71.5 per cent iron ore price rise for this year they would have been laughed out of the research department and onto the street. Too sensational.

When earnings forecasts are based on a host of factors outside the control of management, they are hardly worth reading. Airline stocks, resource stocks, stockmarket stocks, insurance stocks and cyclical stocks all come into this category. All the research is guesswork.

So what do you trust when you realise the research is wrong? It's a bit like looking at the stars: think about it too hard and your whole philosophy on life, research and the stockmarket will change. How can you rely on the forecasts you're seeing in BHP research? You can't and, truth be known, the first people to tell you that would be the experienced analysts who write the stuff. They've seen it all before. They're the ones who had to double their BHP net profit forecasts in the past 24 months. They're the ones who had to chase oil, iron ore and coal price assumptions for the past two years, always behind the eight ball. They know how flawed the whole forecasting process can be.

But don't despair, it's the not knowing or the guessing that adds risk to stocks. With risk comes reward. It's the risk that has rewarded people with BHP's 60 per cent outperformance over the past 20 months. With volatile earnings forecasts come volatile share prices. Great in the good times. Not so great in bad times.

From 1995 to 1999, BHP underperformed the All Ordinaries Index by 54 per cent, and Rio Tinto by 30 per cent. Who's to say that iron ore prices won't halve next year? Coal prices, too. Who knows what the Chinese economy will do. Is BHP safe? Don't know, but one thing's for sure; you won't find the answers in the earnings forecasts. There's no safety in a BHP P/E.

You set-and-forget merchants should look through the portfolio now, at its peak, and identify ahead of time which stocks are the good bedfellows and which are the one-night stands. It's the only way you're going to avoid waking up to a dog in your bed.

Marcus Padley is a stockbroker and author of the daily stockmarket newsletter marcustoday.com.au

COMING FLOATS

Company Money raised Proposed listing time

ABRA Mining $9m March 31

Australian Repackaged Transactions $200m tba

Australis Mining $6m March 7

Childs Family Kindergartens $15m March 21

Emerging Leaders Investment $100m March 22

Everest Babcock & Brown Alt Inv $300m April 1

Fat Prophets Australia Fund $40m April 21

Frigrite $41m March 15

Hastie Group $186m March 24

Hastings High Yield Fund $300m April 11

Kentor Gold $6m March 16

Kryocor $5.5m April 14

Macquarie Capital Alliance $1bn April 8

Macquarie Private Capital Group $55m March 22

Macquarie ProLogis Income Trust $150m March 31

Murchison Metals $5.5m tba

Select Managed Funds $30.4m March 30

Southern Gold $5m March 24

Territory Iron $10m March 15

Warrenmang $6m tba

ZBB Energy $6m tba

© 2005 The Age

Back to News Index | Back to Home