Is it? Isn’t it? The start of a strong recovery, that is. Who am I talking about? Mega miner Rio Tinto (LSE: RIO).
Rio’s share price crashed by 64% between July 2011 and 20 January this year. Since then though, we’ve seen a 29% recovery to 2,030p, on the back of an uptick in the prices of some key commodities — iron ore, copper, aluminium and gold have all regained some lost ground.
But there’s still a 47% fall in earnings per share (EPS) expected this year, leaving the shares on a forward P/E of 22 — and even a 45% EPS recovery mooted for 2017 would only drag that down to 15. Considering the major uncertainties over Chinese demand for the next couple of years, those currently banking on a sustained recovery might be taking too much of a risk.
Forecast dividends are still strong, but they’re falling and will almost certainly need to be cut if the hoped-for recovery hasn’t really started yet. There’s also the small matter of Rio Tinto’s debt — at the end of 2015 the firm was carrying net debt of $13.8bn (although that was a little better than a year previously). I’d like to see some dent in that before I’d be confident, together with a sustained improvement in commodities prices for a few months.
Oil back on track?
I’m particularly pleased to see Premier Oil (LSE: PMO) shares up 179% since trading resumed after January’s suspension — it means I’m now only around 35% down on my investment after an early 75% drop. At 53p, the shares are still down nearly 90% over five years mind, and the recent uptick has been for two reasons.
The price of oil broke above $40 per barrel a few days ago for the first time this year, from under $30 in mid January — as I write, a barrel of Brent Crude is going for $40.28. The firm’s acquisition of the whole of E.ON’s North Sea assets for $120m (which was the reason behind the suspension of the shares) also gave the price a boost, with investors impressed that Premier was able to snap up cheap assets while they were available.
The big downer still is Premier’s debt of $2.24bn, although plans are afoot to reduce it. Is Premier Oil back to winning ways? I do hope so.
Groceries success?
I’m less optimistic about Ocado (LSE: OCDO), the internet shopping company that ‘s also behind Wm Morrison‘s online offering, and whose shares are down 44% since their July 2015 peak to 263p. The company took a few years to turn its first profit, which it achieved in 2014 and followed it by a stronger 2015. We now have EPS rises of 36% and 57% forecast for this year and next, respectively.
But that puts the shares on a forward P/E of 100 for 2016, dropping to 64 a year later. And while such high multiples can be common when a new company is just getting going, I’m really not sure Ocado can generate the earnings levels needed to get down around the long-term FTSE average P/E of nearer 14.
Morrison’s deal with Amazon won’t help, and there are rumours that new chief executive David Potts wants out of the Ocado deal as soon as possible.
