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JCoure

12,929 Posts.

132

06/08/17

12:27

Post #: 26319165
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Originally posted by CosmicTitan ↑

Thank you for disagreeing as it does promote rational polite discourse.

I tend not to buy into companies with diversified income. I made an exception with BHP as I don't think the management can do a worse job than they have done recently i.e. all upside (purchased at $17). For the same reason I won't buy FMG ( a pure play) as it is in the top 5 mining companies in Australia in terms of being well managed. There is not much more they can do despite their second rate ore bodies and remain at the mercy of the iron ore price. FMG is really now a simple leveraged bet on the price of iron ore.

There is a real tangible thing as conglomerate discount. It exists. Large diversified companies tend to trade at a discount to their intrinsic value (typically around 15%). The reason you like diversification is ironically the primary reason why it is a bad thing. It is all about capital allocation. In a diversified company the dogs compete with the stars (huge growth potential) for capital. It is very easy to make a case for a failing company for a capital injection (thus destroying value). This is really a cross subsidy issue. What happens is the stars that need the capital for growth are starved in favour of keeping the dogs afloat. This is because not so smart capital managers do not allocate capital based on value creation rather but on things like earnings and cash. It is a capital mis-allocation kind of thing. The market notices this phenomenon and discounts the company.

In the case of Iluka there is a simple question you have to ask yourself. If Iluka spun off the royalty into a separate company and the mineral sands into another in 2012, and gave you shares in each would you be better off today? The fact is YOUR royalty as an Iluka shareholder has been used to keep an ineffective dog afloat instead of making market forces mould the dog into a lean mean mineral sands machine.

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If RIO is worth $65, BHP has to be worth about mid $30s, $25.72 makes no sense whatsoever to me.

BHP Price at posting: $25.72 Sentiment: Buy Disclosure: Held
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(20min delay)
Last $40.79		Change 0.070(0.17%)		Mkt cap ! $203.9B

Open	High	Low	Value	Volume
$40.87	$40.90	$40.61	$106.7M	2.616M

Buyers (Bids)

No.	Vol.	Price($)
23	14704	$40.78

Sellers (Offers)

Price($)	Vol.	No.
$40.80	9419	22

View Market Depth

No.	Vol.	Price($)
1	75	38.200
1	2481	38.190
1	7416	38.170
1	38887	38.160

Price($)	Vol.	No.
38.250	46736	17
38.260	73656	4
38.270	50751	4
38.280	8616	2

Last trade - 14.00pm 03/12/2024 (20 minute delay)

BHP (ASX) Chart

Off and racing, page-116

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