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Is It Safe To Buy Rio Tinto plc, Utilitywise PLC And AVEVA Group plc After Today’s News?

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Shares in iron ore giant Rio Tinto (LSE: RIO) rose by nearly 3% this morning after the firm said that iron ore production had risen by 13% to 84m tonnes during the first quarter.

However, delays with Rio’s AutoHaul automated railway system have caused the firm to cut iron ore production guidance for 2017 to between 330m and 340m tonnes. The target was previously 350m tonnes.

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This cut may provide a little extra support for iron ore prices, which have already risen by around 20% in 2016. This is good news for Rio, which gets the majority of its profits from iron ore.

Brokers have upgraded earnings forecasts for Rio by 12% to $1.41 per share since February. This year’s forecast dividend of $1.20 per share (about 83p) looks increasingly safe.

At current prices, Rio stock offers a forecast yield of 3.8%, which is significantly higher than most other big miners. In my view, now could be a good time to buy.

Cash boost helps lift shares

Shares in Utilitywise (LSE: UTW) rose by 5% this morning, after a deluge of updates. Utilitywise helps businesses find the cheapest energy and water supply contracts for their business.

The firm said this morning that it has agreed more favourable terms with another of its existing suppliers. This will result in a £2.251m cash payment relating to historic contracts, plus more cash upfront from future contract extensions.

It also issued bullish half-year results. Revenue rose by 36% to £41.6m during the first half, while adjusted earnings per share rose by 21% to 9.8p. These numbers suggest to me that Utilitywise is on track to meet full-year forecasts for earnings of 19.3p per share.

Today’s gains put the stock on a forecast P/E of 9.9 with a prospective yield of 3.2%. This low P/E rating seems cheap but I believe the firm’s long-term earning potential is uncertain. Utilitywise’s operating margin has fallen from a peak of 31% in 2011 to about 20% last year.

Utilitywise may be hoping that a change of management will reverse this decline. The group announced the appointment of a new chief executive this morning. Founder and current chief executive Geoff Thompson will become executive chairman, with a focus on strategy.

Should you pay for quality?

Industrial software firm AVEVA Group (LSE: AVV) bounced 5% higher to 1,595p this morning after confirming that full-year results are expected to be in line with expectations.

This puts the stock on a forecast P/E of 24 for 2015/16, which seems quite pricey. However, Aveva does appear to be a high quality business. The group had net cash of £105.7m at the end of September 2015, equivalent to 2.5 times this year’s forecast profits.

Aveva’s high profit margins and low capital costs mean the firm generates a lot of free cash flow. This helps to make the firm’s dividend payout very safe, although the yield is below average at 2%.

Earnings per share have fallen since 2014 and are expected to rise by just 6% in 2017. The outlook may improve when the oil market — a key customer — starts to recover. Until then, I’d rate Aveva as a hold.

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Roland Head owns shares of Rio Tinto. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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