BHP Upgraded on Improving Economy - Analyst Blog

We upgrade our recommendation on BHP Billiton Ltd. (BHP) from Neutral to Outperform based on our optimism of the increased production in the first quarter of fiscal 2011 driven by the gradual market recovery since the start of calendar 2010.

BHP Billiton reported higher production for the first quarter of fiscal 2011 with a 6% year-over-year increase in its iron ore production and 3%, 3% and 10% increases in its oil and natural gas, copper, and coking coal production, respectively. During the quarter, expenditure on minerals exploration and petroleum exploration was $129 million and $74 million, respectively.

BHP Billiton also provided guidance of $900 million for petroleum exploration expenditures in fiscal 2011. Based on our optimism for the above, we upgrade our recommendation and increase the EPS estimate to $5.35 and $5.20 for fiscal 2011 and fiscal 2012, respectively.

BHP Billiton's commitment to long-term growth through its key investment strategy looks promising with 20 projects on hand. During fiscal 2010, BHP delivered five growth projects and approved two major growth projects with a total budget of $695 million and made pre-commitments totaling $2,237 million to start work on four more projects.The company, at present has 20 projects on hand totaling $25 billion.

Further, we believe that theongoing industrialization in China, the largest iron-ore importer, will improve the demand and price of its products in future. Fiscal 2010 bears evidence of the fact that both demand and prices improved due to strong recovery in China and India.

The company maintains a progressive dividend policy with fiscal 2010 dividend of $0.87 per share, up from $0.82 per share in fiscal 2009, which represented an increase of 17.1% from fiscal 2008. A continuous growth in dividend raises shareholder's sentiments and confidence, which inspire our optimism about the stock.

The stock retains its Zacks #1 Rank, equivalent to a short term “Strong Buy” rating.