Why I see good value in the BHP share price today

It’s not often you look at an ASX blue-chip and think it’s undervalued, but that’s what I think about the BHP Group Ltd (ASX: BHP) share price right now.

How has the BHP share price performed this year

Shares in the Aussie iron ore miner jumped 1.3% higher to $36.10 per share in yesterday’s trade.

That means the BHP share price is now down 7.3% from where it started the year. For reference, the S&P/ASX 200 Index (ASX: XJO) is down 10.1% in 2020.

That means BHP is already outperforming many of its ASX 200 peers. So, where could the boost to intrinsic value come from in 2020?

Macroeconomic tailwinds could be the key

I think a surging iron ore price is a big factor here. Resources shares like BHP are largely beholden to whatever the commodity price is at the moment.

According to Market Index data, iron ore prices are currently at US$101.54 per tonne. That means the key commodity price is now up 36.9% since 23 March when we saw the bottom of the bear market.

That’s good news for the BHP share price and its FY20 earnings in August. Higher iron ore prices should translate to higher revenues and more cash flow available for dividends and reinvestment.

I see a potential infrastructure boom as a key tailwind for the BHP share price. The coronavirus pandemic proved to be the trigger for Australia’s first recession since 1991/92.

It’s purely speculative at this point, but it’s not hard to see the federal and state governments turning to infrastructure to kickstart the economy. Infrastructure projects can employ huge numbers of people and require significant resources.

That includes significant amounts of steel for major projects, which could boost demand for iron ore.

Why I see good value in the iron ore miner today

If it’s all good news, why is the BHP share price still down 7.3% in 2020?

For one, the Aussie dollar could make or break Aussie exports in 2020. A low dollar is good for exports as it makes Aussie products relatively cheaper for other countries. However, the AUD–USD exchange rate has rocketed higher since March and the Aussie dollar is now buying 69 US cents.

Many miners are facing increased scrutiny over their operations at the moment after some high-profile controversies in recent months. On top of mounting pressure, there’s also the question of whether the BHP share price is a strong relative buy versus its peers.

Shares in the company are trading at a price-to-earnings (P/E) ratio of 13.5 as at yesterday’s close. That’s nearly double that of Fortescue Metals Group Limited (ASX: FMG) and near-identical to Rio Tinto Limited (ASX: RIO).

That says to me that investors don’t see enough upside in the BHP share price right now. While investors aren’t piling in just yet, I think BHP is worth keeping an eye on this year at the very least.

If we do see an infrastructure boom, I think that could be the key to boosting the BHP share price back into the positive in 2020.

More reading

• Why the CBA share price is worth watching this quarter
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 drops on return of lockdown in Melbourne
• These ASX shares are swept up by the new Victorian COVID-19 lockdown
• Why brokers have just downgraded BHP and these ASX stocks today

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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