The major problem with mining companies such as Rio Tinto (LSE: RIO) is that their profitability is highly dependent upon the price of commodities over which they have only limited control. However, while the outlook for iron ore (which accounts for around 90% of Rio Tinto’s profit) is poor at the moment, the company is cutting costs and becoming more efficient. As such, the impact on its bottom line is not as significant as for many of its sector peers, with its shares now offering good value for money after a fall of 13% in the last year.
Looking ahead, Rio Tinto could be a surprisingly strong performer. It trades on a price to earnings growth (PEG) ratio of just 0.6 and, with excellent finances, a low cost curve and sound strategy, could deliver excellent capital gains.
Although last year was tough for BAE (LSE: BA), its forecasts for 2015 and 2016 continue to be upgraded. As such, it is now expected to post a rise in profit (following last year’s fall of 10%) of 2% this year and 6% next year. And, with the global economy continuing to show signs of improvement – particularly in the US, which is a key market for BAE, it would be of little surprise if its bottom line guidance continued to improve.
While BAE’s growth over the next couple of years is not quite on a par with that of the wider index, it is set to make the current valuation discount to the FTSE 100 difficult to justify. For example, BAE has a price to earnings (P/E) ratio of 12.9 versus 16 for the FTSE 100, which indicates that an upward rerating could be on the cards.
Having more than doubled in five years, shares in British Land (LSE: BLND) continue to benefit from improving investor sentiment. And, looking ahead, it is likely that this trend will continue, as the company’s property portfolio continues to gain from rising prices across the UK (particularly in London and the south east).
As such, a price to book (P/B) ratio of 1 seems to be increasingly difficult to justify, with an improving economy having the potential to boost British Land’s net asset base at an even faster rate. In fact, it has grown from £4.9bn to £8.6bn in the last four years and, with it set to continue, further share price rises are very much on the cards.
Also benefitting from an improved economic outlook is Berkeley (LSE: BKG). The house builder may have seen sentiment weaken as a result of the increased stamp duty for prime properties introduced in the last parliament but, with the Bank of England stating that interest rates are unlikely to rise in the next year and even then by only a small amount, Berkeley’s future looks very bright.
That’s because it is reliant upon foreign buyers for a sizeable chunk of its sales and, with lower interest rates meaning a weaker sterling, the UK should remain a popular place to invest for foreign buyers over the medium to long term.
Although Antofagasta (LSE: ANTO) has seen investor sentiment pick up sharply in recent months, with its shares being up 8% in the last quarter, it still offers tremendous value for money. For example, it trades on a PEG ratio of just 0.4 and has a P/B ratio of just 1.45; both of which indicate that its share price could move much, much higher and still not be particularly expensive.
Of course, Antofagasta may not be quite as financially sound as some of its larger peers, but on such an appealing valuation it appears as though it has a sufficiently wide margin of safety to adequately take this into account. And, with a forward yield of 2.3% from a dividend that it covered 2.5 times by profit, it could prove to be a strong income stock, too.
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Peter Stephens owns shares of BAE Systems, Berkeley Group Holdings, British Land Co, and Rio Tinto. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.