Glencore’s (LSE: GLEN) share price has lost around 11% from its 20 May 12-month traded high of £5.05. There are two key reasons for this downturn, in my view, neither of which is set to last.
Changing market dynamics
The first was a slide in the price of oil — a key product for the company. A risk is that this bearish trend continues for the foreseeable future, of course.
However, I think this unlikely, as the current oil demand and supply balance looks set to shift. The start of June saw oil cartel OPEC extending 3.66m barrels per day (bpd) of production cuts to the end of 2025. Another 2.2m bpd will be extended to the end of September 2024.
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Together, these cuts comprise around 5.7% of global oil demand. Cuts in global supply are generally bullish for oil prices.
This ties into the second reason for the fall in Glencore’s share price, which is the demand outlook from China.
From the mid-1990s to the onset of Covid in 2019, it had been the key buyer of many commodities, including oil. However, last year it achieved its official economic growth target of around 5%, and the same target is in place this year.
Rising demand from China is also generally good for several commodities prices.
Another risk here for Glencore is if China’s apparent economic recovery falters.
Undervalued?
Glencore now trades on the key price-to-book ratio (P/B) share valuation measurement at 1.6. This compares to the average 2.0 of its peer group, so it is cheap on this basis.
It also looks cheap on the key price-to-sales (P/S) ratio. Its P/S of just 0.3 is by far the lowest in its peer group, the average of which is 2.2.
This valuation gap looks even less justified to me when factoring in Glencore’s strong 2023 results. And these were made in a year that saw lower prices for many of its key commodities.
Its adjusted EBITDA came in at $17.1bn. It also generated $15.1bn in cash from operating activities. Both can be powerful engines for growth.
Overall, consensus analysts’ expectations are that its earnings will increase by 10% a year to end-2026.
Is it time for me to buy?
I already have holdings in the commodities sector, so any more would unbalance my portfolio.
I am also at a point in my investment life when I am broadly happy with the risk-reward profile of those investments too.
My focus after I turned 50 a while back is on relatively low-risk but high-yield stocks. I aim to increasingly live off the dividends while reducing my working commitments.
However, if I was at an earlier phase of my investment cycle then I would buy Glencore now for three reasons.
First, I think the shares look undervalued. Second, I think the business looks set for strong growth. And third, I think this should support further rises in overall dividend payouts.
