BHP confident despite economic gloom and Persimmon takes a more thorough path

Tuesday, August 20, 2019 - 09:52

“A pick-up in corporate news stimulated interest in the markets including new sales data driving shares in UK supermarkets. Investors also seemed more upbeat in various parts of the world amid hopes of more stimulus to support economies.

“The FTSE 100 advanced nearly 0.3% to 7,208 and other markets in Europe were also in a positive mood. Asian markets were mixed including a 0.1% drop in Shanghai’s SSE Composite versus a 0.6% rise from Japan’s Nikkei 225,” says Russ Mould, Investment Director at AJ Bell.

BHP

“Diversified natural resources group BHP seems quite confident about the future given generous dividend payments and willingness to keep spending billions of dollars on project developments and looking for the next big metals or energy discovery.

“One might have expected the company to conserve cash and go into cautious mode given a backdrop of gloomy economic data. However, it seems like it is business as usual for BHP as it lays out plans to spend around $8 billion a year on capital and exploration expenditure.

“While considerably less than the $20 billion-plus it used to spend in the previous commodities boom, this is still a very significant amount of money.

“Big miners like BHP have historically thrived in more different market conditions thanks to having world-class assets with low operating costs. If commodity prices fall sharply, someone like BHP would have a better chance of still being able to operate profitability versus many of its competitors which could struggle.

“BHP, like most of its FTSE 100 natural resource peer group, has been streamlining its business in recent years and paying more attention to achieving greater operational efficiencies and stripping costs out of the business. That should put it in a stronger position should there be another commodities downturn.

“However, the current negative backdrop would suggest BHP may find it hard to keep growing earnings at the current rate, particularly in the short term.”

Persimmon

“Housebuilder Persimmon is following a very similar path to the one paved by its rival Bovis Homes a year or two ago.

“Running into issues with build quality and customer satisfaction it is responding by slowing the pace of everything down in order to make sure its homes are well-built, move-in dates are reliable and everything has been checked properly.

“This is to be applauded and arguably the company had little choice given its ability to sell under the Help to Buy scheme had been openly questioned by Government ministers who, as well as flagging construction problems, also pointed to the outsized pay packet received by former CEO Jeff Fairburn.

“Persimmon’s margins are still industry-leading but their peak levels ultimately proved unsustainable and they are likely to continue to narrow as costs increase and as house prices stall.

“If we adopt the principle that the bigger they are, the harder they fall on profitability, then more acute earnings shocks could be in stall for Persimmon than its peer group.

“And does the asking price for the shares adequately reflect the fact it is a bit of a fixer-upper?”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.