The great commodity stock revival was fun while it lasted but now it seems to have run out of road. A slowdown was inevitable given the unsustainable nature of the surge, which saw some stocks more than double in value in a matter of months.
Mining giant Anglo American (LSE: AAL) was one of the most spectacular performers, its share price almost tripling from a low of 226p in January to 621p today. Yet all that has really done is recoup the equally spectacular losses it suffered in 2015: today’s share is still half its opening value of 1,200p in January 2014.
Although Rio Tinto (LSE: RIO) has been less volatile, today’s 1,798p is well below its 3,018p opening price in 2014. This short-term volatility conceals a long-term sectoral slide going back more than a decade: Anglo American traded at a comfortably higher price of 1,980p a full 10 years ago, while Rio Tinto was also up at 2,244p. These figures don’t include dividends re-invested for growth, but negative share prices over such a lengthy period tell us that the commodity super-cycle started running out of road a long time ago.
Life goes in cycles so at some point the upswing will surely come, the question is whether today’s entry price is one worth paying. Today, Anglo American is valued at 13 times earnings, while Rio Tinto is trading at 10.7 times. They clearly aren’t the bargains they were, especially Anglo American, which traded as low as two or three times earnings during January’s market rout.
Both companies have worked hard to cut costs, pay down debt and bolster their balance sheets. Recent buyers have been willing to overlook the death of Anglo American’s dividend, with the stock on a forecast yield of just 0.5% The company’s struggles will continue this year, with an expected 38% drop in earnings per share (EPS) but investors can look forward to a brighter 2017, when EPS is predicted to rise 38%.
After five years of sharply negative EPS (-55%, -8%, -17%, -63% and -38%) this may suggest that Anglo American is turning a corner. But this is primarily due to falling costs rather than soaring revenues, which will rise only slightly from £12.98bn to £13.79bn in 2017, while pre-tax profits are actually forecast to fall from £973m to £935m.
Rio lacks brio
Rio Tinto is the most robust of the FTSE 100 mining giants but even its dividend has been unable to withstand the commodity slump. Today’s misleadingly eye-catching 7.8% yield is forecast at just 3.6% by the end of next year. Low prices are hurting its prospects, with EPS on course to fall 36% this year, and rise just 7% in 2017. As with Anglo American, both revenues and pre-tax profits are expected to rise only marginally next year, suggesting the road to recovery will be a long one.
That doesn’t surprise me. The macro outlook is poor as US growth slows, the European Central Bank runs out of ammunition, Brexit threatens to become a reality and the clouds darken over the Chinese growth story (which is what fuelled all the commodity excitement in the first place). The time to invest in these two stocks was during the January sell-off. I don’t see it as a rewarding time today.