Is the Glencore share price a buy or should I grab FTSE 100 faller Ferguson?

Do FTSE 100 (INDEXFTSE:UKX) fallers Glencore plc (LON:GLEN) and Ferguson plc (LON:FERG) deserve a buy rating, asks Roland Head?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Many cyclical stocks have fallen sharply over the last couple of months, as investors have taken a cautious view on global growth. Today, I’m going to look at two big fallers from the FTSE 100.

The first is mining and commodity trading group Glencore (LSE: GLEN). The group’s share price has fallen by 23% so far this year, leaving it lagging far behind rivals such as Rio Tinto (-7%) and BHP (+3%).

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

One reason for this is that Glencore has been hit by a US Department of Justice investigation into its operations in the Democratic Republic of Congo. But the group’s financial performance has remained strong. I’m not sure the stock deserves such a big discount to rivals.

Too cheap to ignore?

Glencore’s recent trading results certainly suggest to me that this business is firing on all cylinders. During the first half of the year, adjusted operating profit rose by 35% to $5,119m. The group’s funds from operations — a measure of cash generation — rose by 8%, from $5,201m to $5,625m.

Market conditions are fairly favourable for most major commodities, and the firm’s management appears to have been taking advantage of this. Production of copper rose by 12% to 1,063,100 tonnes during the third quarter. Nickel, zinc and coal also logged increases.

Analysts expect earnings to rise by 20% to $0.49 per share in 2018, providing generous earnings cover for the forecast dividend of $0.21 per share. These forecasts put the stock on a 2018 price/earnings ratio of 7.8, with a 5.4% dividend yield. In my view, that’s cheap enough to factor in the risks faced by the firm. I’d rate the shares as a buy at this level.

Should I be worried?

The share price of FTSE 100 plumbing and building supplies group Ferguson (LSE: FERG) has fallen by about 20% since the start of October. This sharp sell-off seems to have been caused by wider market woes rather than by problems at the company, which was previously known as Wolseley.

In its first-quarter trading statement today, Ferguson said that sales rose by 8.5% to $5,554m during the three months to 31 October. Trading profit — a measure of operating profit — rose by 9.9% to $432m.

The group’s business is mainly focused on the US market these days, which provides more than 80% of sales. Although it’s early in the year, at this stage chief executive John Martin expects the firm’s full-year results to meet expectations for earnings growth of 18%.

There’s no obvious reason for concern. But Ferguson shares are down by nearly 4% at the time of writing, after this morning’s figures. As a shareholder, should I be worried?

A cyclical peak?

I’ve been impressed with this firm’s ability to generate high returns in a competitive sector. During the year to 31 July, Ferguson generated a return on capital employed of 20%. A similar figure seems likely this year.

However, it’s worth remembering that this is a cyclical business. Recent news reports indicate that US construction spending may be flattening, or even falling. In such a scenario, Ferguson’s profits could peak, and the company could see a period of slower growth, or reduced earnings.

Faced with an uncertain outlook, I think Ferguson shares are probably priced about right at the moment, on 12 times forecast earnings, with a 3.2% yield. There are probably better opportunities elsewhere.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

3 top stocks to buy before the market rebounds

Edward Sheldon highlights three beaten-up stocks he'd buy before global stock markets stage a recovery from their 2022 declines.

Read more »