Here’s why there could be further upside for the BHP Billiton Limited (ASX:BHP) share price in 2018 and beyond

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ASX:BHP

Although the BHP Billiton Limited (ASX:BHP) share price is trading at close to a 44-month high, at least two fund managers think there may be more gains ahead for BHP shares in 2018 and beyond.

BHP shares are trading around $32, largely driven by the rising oil price. They last closed above $32 in September 2014, today’s level marking a 44-month high.

It has been a wonderful 12 months for shareholders, with the BHP share price having gained almost 40 per cent, far outweighing the less than 4 per cent gain in the benchmark S&P/ASX 200 index.

Fellow mining stocks South32 Ltd (ASX:S32) and Rio Tinto Limited (ASX:RIO) have also had a stellar 12 months, the South32 share price having gained around 43 per cent, with the Rio share price up around 39 per cent over the last year.

Iron ore the key driver

Although the rising oil price is powering the BHP share price ahead, iron ore remains the biggest driver of BHP profits. In 2017, iron ore made up around 38 per cent of the company’s revenues. Petroleum’s share of revenues was around 18 per cent.

In what may bode well for the iron ore price, BHP forecasts “slow, but sustainable growth” in China steel consumption of about 1 percent a year through the mid-2020s.

Speaking on Bloomberg television, BHP Chief Commercial Officer Arnoud Balhuizen pointed to opportunities from the Belt and Road initiative driving continuous demand for higher-quality raw materials.

Fund managers like BHP and Rio

According to the AFR, at least two fund managers say there could be further gains ahead for mining stocks.

David Allingham at Eley Griffiths said he has backed the resource sector and “they still look cheap even though they have had a good run.”

Garth Rossler, chief investment officer at Maple-Brown Abbott said that with resource-sector companies trading on 11, 12 and 13 times earnings he thinks that when compared to highly valued growth stocks like Treasury Wine Estates Ltd (ASX:TWE) and Aristocrat Leisure Limited (ASX:ALL) “the risk-reward is with the resources companies.”

Mr Rossler said, “We still like the bigger companies such as BHP and Rio Tinto.”

Attractive valuation and fully franked dividend yield

According to Commsec, BHP shares trade on a forecast price to earnings ratio (P/E) of around 13.8 times.

Again according to Commsec, from a dividend perspective, BHP shares trade on an attractive forecast fully franked dividend yield of 4.8 per cent.

In past cycles, rising commodity prices have seen miners rush to add capacity, either organically or by acquisition.

In a sign the sector is showing restraint, BHP’s Mr Balhuizen said the company has no plans to lift iron ore output beyond a target of 290 million metric tons.

A growing global economy combined with high commodity prices means there could be more gains ahead for BHP shares in 2018 and beyond. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au