Watch out!

There were few surprises in the BHP result last night. BHP’s revenue declined 21.4% and normalized NPAT from continuing operations declined 70.5%. Basic earnings per share declined from $2.50 to $1.20, putting the shares of this cyclical business on a price to earnings multiple of close to 20x. We have always expressed the view that the best returns come from the long-term ownership of a portfolio of businesses with true competitive advantages, the most valuable of which is the ability to increase prices in the face of excess supply and without any adverse impact on unit sales volume. Commodity businesses cannot do this. But perhaps the most interesting part of the BHP result was the fact that the company has reduced its costs of production. Sadly, for those trying to pick the low point in resource stocks this means the price of these commodities will remain under pressure and are likely to fall further. Why? Because no benefit accrues from lower production costs when all your competitors are also reducing their costs of production. READ THE FULL ARTICLE HERE: (VIEW LINK)