Bernstein's Bullish Stance On BHP Has Come To An End

Analysts at Bernstein's bullish stance on BHP Billiton Limited (ADR) BHP was based on the premise that the involvement of activist investor Elliott Management would bring in some of the necessary changes to the company. But Monday, the firm parted ways with its bullish stance after upgrading the stock to Outperform last July.

The Analyst

Bernstein's Paul Gait downgraded BHP Billiton's (London-listed) stock from Outperform to Market Perform with an unchanged 1,500 GBp price target ($47.19).

The Thesis

Many of the changes Elliott Management hoped to implement at BHP were the same changes that Gait has been advocating for years, the analyst said in a note. BHP also faced a "clear catalyst" in the form of the appointment of a new chairman, Ken MacKenzie.

Over the past few months there were some "positive initial movements" that were observed but now a downgrade is warranted based on, such as the stock's gains to-date, rising met coal prices, and a decreased likelihood the company will totally exit the oil and gas business.

Since the firm's upgrade of BHP's stock last year, it has been the second-best performer of the major diversified miners under coverage, Gait said. The U.S.-listed stock has gained more than 25 percent over the past six months, which makes it difficult to justify further upside from a valuation perspective. Specifically, the stock is trading above its EV/EBITDA multiple dating back to 2006, which may be a cause for concern since current consensus estimates are calling for lower EBITDA generation for fiscal 2019 and fiscal 2020.

Price Action

Shares of BHP Billiton ADRs were trading lower by nearly 1 percent Monday.

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