Company outlook
BHP Billiton Limited (ADR) (NYSE:BHP), the world’s largest mining company, has seen its share price fall by almost 17% for the year to date on the back of flat sales and declining net income, which fell by 23% half on half. Even more worrying is that company’s debt ballooned by almost 30% half on half to almost $36 million. This has resulted in BHP Billiton Limited (ADR) (NYSE:BHP) repositioning many of its operations and engaging in significant cost cutting exercises.
Based on the company’s first half 2013 financial performance, combined with the negative outlook for China, I don’t expect BHP to be reporting stellar results for some time yet. I would expect to see its share price continue to fall over the short term, until the cost control initiatives have gained traction.
Rio Tinto plc (ADR) (NYSE:RIO) is fairing even more poorly than BHP Billiton Limited (ADR) (NYSE:BHP)–for the year to date its share price is down by 27%, and for the first half of 2013 its revenue fell by 19% to $16 billion. However, even more worrying was that net income plunged into the red, falling more than twofold to -$5.6 billion. But this significant decline occurred because Rio wrote down the value of many of its poorly performing assets on the expectation that demand from China will continue to fall. I don’t expect to see any significant recovery in its share price and I believe that revenue will remain flat.
Westpac Banking Corp (ADR) (NYSE:WBK), Australia’s largest home mortgage lender and Australia’s second largest bank by assets and a favorite with U.S. dividend investors with its dividend yield of 6.5%, has been delivering stellar results. For the first half 2013 revenue remained flat, but net income grew by almost 11% half on half to $1.6 billion. The bank has also been able to grow its market share, but like most of Australia’s top four bank’s it is dangerously addicted to debt as a means of financing its lending operations. At the end of the first half it had a debt to equity ratio of over 3, making it particularly vulnerable to negative movements in international credit markets and an economic slowdown in Australia.
In fact it is expected that as Australia’s economy slows loan defaults and the cost of credit will rise, while domestic consumption and the demand for credit will fall. As a result I expect Westpac Banking Corp (ADR) (NYSE:WBK)’s revenue and profitability to decline, as it will not be able to reduce interest costs because of its over-reliance on debt. This will see the bank’s share price decline, and in a worst case scenario possibly even a dividend cut.
Bottom line
It is clear that the economic outlook for Australia is less than optimistic with China’s economic data indicating that its economy will continue to slow. This will have a significant impact on the Australian economy and those companies in Australia that are reliant on commodities demand or the domestic economy for growth. All of which makes me believe that it is time to avoid those companies.
The article Investors Should Be Wary of Exposure to Australia originally appeared on Fool.com and is written by Matt Smith.
Matt Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Matt is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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