intrinsic value ... $39

thought I better get out of the charting thread so ...


Clime came out this afternoon with a note saying BHP might be undervalued
Their price is around $30 and they are saying it's intrinsic value is $39
They describe the price fall as short term volatility on the way to a long term price 30% above what we are seeing at the moment.

There could be a way to go I'd say as the market will probably overreact, but it is already looking like a BUY.
V
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BHP, like all the big diversified miners, is recalibrating its strategy to contend with declining commodity prices following waning global growth. In its most recent half-year report, BHP experienced a drop in earnings and announced asset sales of $4.3B. In the past year it has put projects on hold estimated to cost around $68B.

When it released its results on February, it unveiled underlying earnings before interest and tax (EBIT) was down 38% to US$9.8B, and $1.9B in cost savings.

Net operating cash flows were down 48%, with the effect of the decline in the iron ore price particularly severe despite strong volume growth. BHP said a slowdown in demand for minerals over the next five years made cutting costs and boosting productivity priorities.

Incoming chief executive Andrew Mackenzie, who takes over from Marius Kloppers in May, spoke about productivity in an environment where China's demand for minerals will remain strong.

But strong growth is relative. The likelihood is the growth rate will fall from the heady 15 - 20% per annum over recent years to around 2 - 4% in future years. That means a focus on being low cost becomes imperative.

In such an environment, Mackenzie said, there is appetite for "only the best projects so we… get some of the highest capital productivity". The price of iron ore, one of BHP's most profitable divisions, averaged 27% lower during the six months to the end of 2012. Prices remain volatile and recently fell by around $20/tonne, from $150/t to $130/t, and could fall further. BHP disclosed its sensitivity to the price: a US$1/t increase equals FY13 net profit after tax of about US$110M.

Shale gas is an area of particular opportunity for BHP in the next few years and provides a clear differentiation from some of the other major diversified miners, such as Rio Tinto. BHP is spending $4B this year on its US shale gas assets after acquiring them for $20B in 2011. The US is experiencing a shale oil and gas bonanza, and despite booking a $2.8B charge last August on the value of the assets, the long-term potential is promising.

Despite short-term volatility, management anticipates a modest improvement in global growth, which bodes well for commodities demand. The longer-term outlook for copper appears favourable as anticipated demand strongly outpaces supply growth.

As one of the very few Australian companies that are global leaders in their sector, we are of the view that BHP remains a core holding for diversified portfolios. It is currently trading at a meaningful discount to its intrinsic value of approximately $39.

from memory they use Stockval to value stocks
which is an ROE based method of valuation.