How do you know if BHP’s shares are good value?
The post How do you value the BHP (ASX:BHP) share price? appeared first on The Motley Fool Australia. –
The BHP Group Ltd (ASX: BHP) share price has been a strong performer this year.
Since the start of the year, the mining giant’s shares have risen 22%.
Is the BHP share price still good value?
Given how strong the BHP share price has performed in 2021, investors may be wondering if it is still good value.
Investors may also be wondering how you would begin to value a company like BHP.
Unfortunately, using the traditional price to earnings (PE) ratio is not recommended when valuing a mining share. So, if you’re judging the value of BHP share price purely on this ratio, you may want to reconsider things.
How do you value BHP?
Luckily for investors, the team at Goldman Sachs has provided a breakdown on how it values the mining giant.
Goldman uses an equal blend of its net asset value (NAV) and its next 12-month (NTM) EBITDA estimate to value the Big Australian.
In respect to its NAV, Goldman estimates that BHP’s operations have a NAV of US$179 billion. This equates to US$35.50 per share or approximately A$48.70 per share.
Whereas the company’s NTM EBITDA is estimated by the broker to be US$51 billion. Goldman then applies a 5x EV/EBITDA multiple to this, giving BHP an enterprise value of US$251.3 billion. The broker then subtracts its debt estimate of US$5.9 billion, giving it an equity value of US$254.4 billion or A$66.7 per share.
The final step sees Goldman equally blend its NAV per share of $48.70 with its equity value per share of $66.70, which leads to a valuation and BHP share price target of $57.70.
Are BHP shares in the buy zone?
With the BHP share price currently fetching $52.52, Goldman believes it is in the buy zone.
It recently commented: “Undervalued vs. historical multiple at peak earnings: On an EV/EBITDA basis 1-2yr multiples for BHP look strong at 4x, below the 4.5-5x level in 2011 when earnings last peaked, yet BHP’s balance sheet and FCF are much stronger now.”
Should you invest $1,000 in BHP right now?
Before you consider BHP, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and BHP wasn’t one of them.
The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
*Returns as of May 24th 2021
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.