Commodities giant Glencore’s (LSE: GLEN) share price is down 28% from its 12-month high.
The key reason for this has been China’s stuttering economic recovery after three difficult years of Covid. Before that, it had been the driver of the ‘commodities supercycle’. This was characterised by consistently rising prices for the materials it required for high economic growth.
My view is that China’s economy will recover over the long term, benefitting Glencore’s materials and energy trading businesses.
Clearly, the main risk in the stock is that this recovery does not occur over the next few years. Another is that the company’s trading operations fail to cope with ongoing high commodities market volatility.
China’s economic recovery
I never had any doubt that China would achieve its official 2023 economic growth target of “around 5%”. President Xi Jinping had staked his reputation on it, so that was always going to be the official result.
On 17 January, China’s National Bureau of Statistics did indeed confirm that the economy grew by 5.2% in 2023.
The same target of “around 5%” is set for 2024. I have little doubt that will be achieved either, given the same political will to do so.
Indeed, the end of 2023 saw several measures taken to boost growth, including major capital injections into its economy.
Hugely undervalued?
Glencore is currently undervalued against its peers on three key share measurements.
It trades at a price-to-earnings (P/E) ratio of only 6.6, against a peer group average of 9.8. The group comprises Kenmare Resources (trading at 1.9), BHP Group (12), Antofagasta (12.4), and Anglo American (12.8).
On a price-to-book (P/B) ratio basis, it trades at 1.4, compared to its peer group average of 1.8. Kenmare Resources is at 0.3, Anglo American at 1, Antofagasta at 2.4, and BHP Group at 3.5.
And it trades at a price-to-sales (P/S) ratio of just 0.3 against an average of 1.9 for its peer group. Kenmare Resources is at 0.7, Anglo American at 0.8, BHP Group at 2.9, and Antofagasta at 3.2.
A discounted cash flow analysis shows Glencore shares to be around 57% undervalued at their present price of £4.19.
Therefore, a fair value would be around £9.74, although this does not necessarily mean they will ever reach that level.
Big passive income generator
Glencore paid a total dividend of 52 cents per share in 2022, 8 cents of which was a special dividend. At the current exchange rate and share price, this gives a yield of 9.8%.
There is no telling whether it will pay another special dividend this year. But it did so in 2020 and 2021.
However, even without the special payout, the regular dividend of 44 cents (about 35p) gives a return of 8.4%.
So, a £10,000 investment now could make another £8,400 over 10 years, provided the yield averaged the same. There would be tax implications according to individual circumstances, of course.
I already hold shares in other commodities companies, so buying Glencore stock would unbalance my portfolio.
But if I did not have these other holdings, I would buy it for the long term. I think its yield will remain high, and its share price will gradually converge more towards fair value.
