What's the cheapest share in the Footsie?
What's the cheapest share in the FTSE 100 on a forecast P/E basis? Don't check it out, guess. Yes I know, I hate these silly games too.
If you weren't fully aware of the state of major shares you might think a housebuilder, or a bank perhaps. Both of those sectors are rated pretty cheaply -- though I'm no making no comment on whether that cheapness is deserved or not. But it may surprise some to learn that the most beaten down sector of all right now is big mining. Three of its constituents are actually the lowest three P/E shares in the index and not far behind comes the rest of the sector.
In third place is Kazakhmys
(LSE: KAZ)
at a price of 1,223p and forecast eps for 07 of 148p, its P/E is 8.3. Second comes Antofagasta
(LSE: ANTO)
at a price of 426p and forecast eps for 07 of 54p, its P/E is 7.9.
But the winner is Vedanta Resources
(LSE: VED)
at a price of 1,261p and forecast eps for 07 of 190p, its P/E is 6.6, a level which verges on being given away -- on the face of it.
The question for value players is why this state of affairs prevails and even if there is a valid reason, has it been overdone?
Antofagasta, or Fags as it is known in the market, has been around forever. I recall that even when I first got interested in shares, and that really is a long time ago, Fags had already been around for some time. Back then it was a South American copper play, seen as fairly risky because of potential political unrest that was always in the air in that region. This was the time of revolution, Che Guevara etc. Fags is still primarily a copper play.
In contrast to Fags longevity, Kazakhmys and Vedanta are newcomers to the market. KAZ is also engaged in copper whilst VED is a little more broadly based to include zinc and aluminium though copper remains its principal product, delivering 61% of turnover in the latest accounts.
Mining shares, especially those with only one major ore, are in the short term very much plays on the price of their product with a lot of what I call emotional gearing involved. What I mean is that they tend to over react in the short term to the market price of the commodity, both on the up and the downsides. Long term they are driven by earnings like any other share but short term, the product price tends to be the major influence.
So straight away it is noticeable that copper is the sole or main ore of the three cheapest miners, which are also the cheapest of all shares in the big cap market.
Now the reason in my view why all the miners are pretty cheap is that it is widely believed that metal prices will fall over the next couple of years. For that reason, all three of these shares' forecast eps are set to fall in 07. Falling eps is not normally conducive to a high P/E and hence the market has awarded them the low levels now seen, exacerbated by the emotional gearing that features particularly with mining and oil shares.
The question for value players is whether they buy this story. That these shares are on extremely low P/Es relative to the market, especially Vedanta, is without question. What is questionable is whether they deserve it or whether the market has under rated them.
I think it may be worth taking the risk that the sell off has been overdone, especially on Vedanta because it is the cheapest. However this is high risk stuff, make no mistake. The price of this share will be tied to copper and any downgrading of forecasts will probably hit the shares quite badly. On the other hand if the forecasting is seen at some stage to be too pessimistic and future eps is revised upwards in consequence, the change would likely have a very powerful positive impact on the shares due to the emotional gearing.
I was going to say a meteoric rise in the shares, a clichéd metaphor applied commonly to rapidly rising prices. However I never understood it, meteors fall don't they?
