BHP Billiton Ltd. (BHP) is the world's largest diversified resource company with operations in 25 countries. Notwithstanding the associated anti-trust issues, we believe a potential merger between BHP and Rio Tinto (RTP) can deliver synergy benefits and offset rising operating costs, which have been trending upwards.
In addition, the merged company will become the world's largest producer of copper and aluminum, and the second-largest provider of iron ore. Nonetheless, given that Rio Tinto rejected the terms of the original proposal, the deal seems far from certain. We retain our Hold recommendation on shares of BHP.
We have valued BHP using the P/E valuation metric and forward earnings estimates. Currently, the stock is trading at 14.6x our FY08 earnings estimate of $5.68 per ADR. While the company is benefiting from strong demand and high commodity prices, negative impact on the company's operations from a declining dollar, high operating costs and concerns about an economic slowdown leads us to put a cautious view on the stock.
As a result, we do not expect a significant expansion in P/E multiple at this time. Our target price of $86.00 is based on a P/E of around 15.1x our FY08 earnings estimate of $5.68 per ADR.
Read the full analyst report on BHP.
Read the full analyst report on RTP.
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