Stock of the Week
NYSE Symbol: RIO
Industry: Mining Aluminum, Copper, Iron Ore, other minerals.
Price as of 1/17: $54.82
The markets are off to a good start with the S&P 500 rallying 3.5% year to date. Virtually everything is working as the market rally is broad based which is a good sign. The Dow Jones Transportation Average took off like a rocket in mid-November making new recent 52 week highs, another long term bullish indicator. Underperforming sectors like energy and materials have come to life since mid-December. The financials continue to outperform after a big run up in 2012. The leading sector so far in 2013 is healthcare. Ironically, the stand out stock from 2012, Apple has struggled to find its legs in 2013. Earnings for Apple come out on January 23rd and while the company may be experiencing a modest slowdown, the earnings power and cash flow are tremendous. Apple has earnings power of $60 a share and will accumulate over $200 billion in cash within the next two years. I would expect a good sized share buyback if the stock falls further.
It's getting tougher to find undervalued areas with the recent run up. Bullish sentiment and the VIX index are indicating while we may have more room to the upside, investors are getting too bullish. We may get a minor correction within the next month however the long term trend is upward. A major theme for 2013 starting to develop is renewed global growth not only in China, but elsewhere. The main benefactors for global growth will be transports or Industrials, Materials and the Energy space. A rebound in the price of copper and other commodities are a good long term indicator but have the adverse effect of causing global Inflation. Inflation would not be good news for bond funds which everyone has piled into the last several years. If Inflation does rear its' ugly head, stocks and commodity related stocks should outperform.
This week we'll highlight a commodity company not participating in the recent rally. The stock of the week is Rio Tinto. Rio Tinto is making news today and not the news you want to make. The CEO and another top executive have been fired following a miserable write down of $14 billion for bad acquisitions over the last 5 years. But the future is much brighter than the past. With the stock currently trading for 8 times earnings, the stock's recent pullback looks like another good entry point to get into this diversified miner whose business is reaccelerating.
Rio Tinto is the 3rd largest miner in the World with one of the most diversified portfolios with exposure to such minerals as aluminum, coal, copper, diamonds, gold, iron ore, industrial minerals, and uranium. Iron Ore represents a majority of the mining business. Rio Tinto has cost advantages over their competitors allowing them to make money even during down turns providing a steady income source for earnings, cash flow, and their dividends.
Consensus sales and earnings estimates for Rio Tinto are expected to reaccelerate this year. Currently sales are expected to rebound by 17% while earnings are expected to grow 23%. Morningstar has earnings growing projections of over 30% with a fair market value of $90 a share or 63% above the current market price. While a $90 price target may be a reach, (average price target is $75) the stock does look very attractive as business looks to reaccelerate this year. The stock will also go ex-dividend in February with a 3% yield.
The mining industry is cyclical and therefore not an ultra conservative stock, but if the global growth does reaccelerate, Rio Tinto and other cyclical names look undervalued at current levels.