Just had a look at earnings profile of BHP and shows up some...

Just had a look at earnings profile of BHP and shows up some intersting things.

Current PE approx 11
Current approx div yield 2.3%

In 2008 Annual Report (1 Jul 07 - 30 Jun08) Underlying Ebit was approx $24 bill

This comprised

Oil $5.5 Bill - 22.92%
Aluminian $1.46 Bill - 6.08%
Copper $7.9 Bill - 32.92%
Steel $1.2 Bill - 5%
Iron Ore $4.6 Bill - 19.17%
Manganese $1.6 Bill - 6.67%
Coal $2 Bill - 8.33%

This is interesting in that over 60% of their profits come from the hardest hit commodities to date (ie Oil, Copper, Manganese), which have all fallen approx 75%. I would imagine they would be very close to their marginal costs at this point in time i.e making next to nothing off them

IO and Coal are insulated somewhat in the short term as a result of annual contracting, but come early/mid 09 contract will be renewed at significantly lower prices also.

Aluminium and steel have basically stopped trading.

The earnings outlook for BHP would appear very dire, and subject to a monumental downgrade.

Considering historic commodity cycles suggest prices are unlikely to rebound any time soon, it would appear to me to be a huge risk to hold this stock at $30 for at least the next 1-2 years.

The way i look at it you are betting against history (and logic for that matter) and receiving low odds in return.

It is only a matter of time before BHP announce earnings guidance significantly lower, and in a brutal market like this i wouldnt want to be holding the stock as it will be given the mother of all shelackings. Huge downside gap risk here, and i wouldnt be suprised if they try to hide the announcement during the christmas period when everyones away.

Beware