Investment Column: BHP will score despite hat-trick of failures

JD Sports Fashion; Taylor Wimpey

Our view: Buy

Share price: 2318p (-88p)

Marius Kloppers must be annoyed. The chief executive of BHP Billiton tried to merge his company with Rio Tinto, but was stopped in his tracks by the global recession and the subsequent decline in metals prices. Then he planned for a Rio-BHP iron ore venture, but that came to nothing because of regulatory issues. Now he has missed out on the Canadian fertiliser giant Potash Corp, after failing to convince the government that the deal would be of net benefit to the country. So, should investors punish Mr Kloppers by offloading BHP's shares?

The short answer is no. The failed deals should not detract from what remains a world-class and cash-rich business. Though clearly ambitious, Mr Kloppers has also proved himself to be an effective manager – and a diplomat. News of the Potash Corp failure was accompanied by plans to restart BHP's shares buy-back programme, paving the way for a $4.2bn capital return. Even after that, and absorbing transaction costs related to Potash Corp, BHP is forecast to be in a net cash position to the tune of about $3bn by the end of next year, according to Goldman. That, as analysts of every shade have been busy highlighting, raises the prospect of a higher dividends and further buy-backs. Goldman, for example, believes that in the absence of acquisitions, BHP could undertake a $20bn to $30bn buy-back by the end of 2012 .

Given the strength of its balance sheet, BHP's stock is cheap, with Barclays Capital putting it on a multiple of just above nine times forecast earnings for the 2011 calendar year. The mining sector, on the other hand, trades on an average of eight times. That premium is far too slight for such a strong company, which offers not just gearing to the growing demand for commodities – and rising metals prices – but also the promise of bigger payouts for shareholders. Buy.

JD Sports Fashion

Our view: Buy

Share price: 785.5p (-11p)

JD Sports Fashion showed many of its rivals a clean pair of heels again yesterday, with like-for-like sales growth of 2.7 per cent for the four weeks to 28 August. A second result was that its gross profit margin (the difference between how much a retailer pays for its stock and what it sells it for) has been maintained for the year so far.

A large part of JD's success has come from the exclusive relationships it holds with brand giants such as Nike and Adidas, which helps it to get the latest ranges in its shops before other chains. It should also be said that JD has been helped by the troubles of its rival JJB recently, while the profitable Sports Direct is largely unloved by sports and fashion aficionados.

Despite JD's strong performance in recent years, its shares still trade on a multiple of just 7.1 times forecast earnings for 2011, a big discount to the retail sector. The shares are less liquid, as Pentland owns 57 per cent, and there are concerns about the outlook for consumer spending. Nevertheless, we think it will remain one of the sector winners, so buy.

Taylor Wimpey

Our view: Buy

Share price: 24.82p (-0.13p)

Britain's housing market is a bombed-out disaster zone, right? So why do anything other than dump the shares of housebuilders? Well, one reason is that the long-term fundamentals for housing are very strong: Britain has a rising population, more people living alone, and a very limited supply of new housing stock. Another plus is that,following some painful restructuring, Britain's housebuilders are in better shape than you might expect.

Taylor Wimpey said yesterday that its profits for 2010 were likely to come in towards the top end of analysts' expectations – forecasts have ranged from a loss of £10m to a profit of £55m, with consensus at £23m.

Even better, the company has made further progress on restructuring its debt, with terms agreed on bank borrowing of £950m, and restrictions on its ability to buy new land having been lifted. The group's North American business continues to struggle and Taylor Wimpey is keen to sell it. Potential buyers are thin on the ground, however, and the unit is likely to continue to hold back the company.

Against that, the shares are trading at about a 50 per cent discount to net asset value, and are fairly priced compared to the rest of the sector. Do not expect stellar performance in 2011, when lack of mortgage availability will continue to hold back the market, but if you are in for the long term, Taylor Wimpey is a buy.

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