I am out shopping for shares again. Should I add Rio Tinto (LSE: RIO) (NYSE: RIO.US) to my basket?
It has been a strong month for the miners, with Rio Tinto up nearly 7%. Loyal investors deserve some respite, because its share price is down over five years (-18%), three years (-6%), two years (-16%) and six months (-17%). Is this part of a commodity stocks recovery and, if so, should I buy Rio Tinto?
Rio has found 2013 tough, recently reporting an 18% drop in half-year underlying earnings to $4.2bn. Management blamed the fall on a combination of the slowdown in China, volatile markets, lower prices and higher effective tax rates, all things it can do little about. Chief executive Sam Walsh expects China to keep decelerating, which is a worry, although he doesn’t expect a hard landing.
Lean and mean
At least Rio Tinto saw this coming, and has been taking defensive action, setting itself “firmly on the path towards becoming a leaner, more tightly-run business”. Walsh has pushed through $1.5bn of savings in the first half of 2013 and cut net headcount by 2,200 to 30 June 2012, yet still produced record first-half iron or production and stronger copper volumes. A 9% drop in capital expenditure to $7bn has helped strengthen the balance sheet. Rio has also offloaded $1.9bn worth of assets this year, although it failed to sell loss-making business Pacific Aluminium, valued at up to £2bn, which Walsh says is “not possible” in the current environment.
The importance of China to commodity stocks was underlined last week, when strong trade and industrial production figures sparked a sharp mining share price rally. I still believe Chinese authorities have let credit to run dangerously out of control but the danger is factored into Rio’s valuation, which trades at 9.6 times earnings, against 15.63 for the mining sector as a whole, and 14.95 for the FTSE 100. Rio currently yields 3.5%, covered three times, against 3.8% for the mining sector and 3.6% for the index. Management policy is progressive too, with a 15% first-half increase to 83.5 cents per share. This is now an income stock as much as a growth stock.
Rio we go
The rest of the year look set to remain choppy, with forecast earnings per share (EPS) growth of -4% in 2013, but that is expected to leap to 19% in 2014, when the yield should hit 4%. I last looked at Rio Tinto in October, when it traded at £31.42, marginally above today’s price. I suggested then this was a good time to grab a handful of this mining stock, and although the share price has done little since, it still looks a buy to me, for patient investors. I’m in good company, with JP Morgan and Deutsche Bank setting a target price of £43. That is 38% above today’s price, suggesting the miners still have room to grow, once the market settles.
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> Harvey does not own shares in Rio Tinto.