Commodity trading and mining giant Glencore (LSE: GLEN) has seen its share price drop around 15% from its 20 May 12-month traded high of £5.05.
There are three key reasons why I think this trend might be set to reverse dramatically — and why I’ve been considering buying the stock.
Earnings growth
The first is that analysts forecast Glencore’s earnings will rise 40% a year to end-2026. This is a very high rate, and earnings ultimately power increases in a firm’s share price (and dividend).
One broad driver for this I think is the likelihood that the energy transition will take longer than commonly thought. OPEC highlights that oil demand will rise to 116m barrels per day (bpd) by 2045 from around 103m bpd now. Glencore is a major player in this market.
Another key catalyst is the economic outlook of the world’s top commodity buyer, China. New measures were announced on 24 September to boost growth after a lull during the Covid years. Glencore is a big supplier of several of these commodities, including iron ore (for steel) and copper (in construction).
The main risk to this earnings outlook is that China’s economic growth stalls. Another is that the energy transition proceeds as quickly as many think.
Share price undervaluation
Glencore’s share price has already risen 10% from when China announced its new stimulus measures. But there is still value left in the stock – the second reason for my bullishness on it.
On the key price-to-book (P/B) measurement of stock value, it currently trades at 1.6 against a competitor average of 2.4. So it is cheap on this basis.
It is cheap too on the price-to-sales (P/S) valuation – trading at just 0.3 against a 2.5 peer average.
How cheap? A discounted cash flow analysis shows it to be 16% undervalued at its present price of £4.24. Therefore, I believe a fair value for the stock is £5.04.
Dividend
The final reason I think the bearishness seen in the past few months in the stock may reverse is the dividend outlook.
Its H1 2024 results released on 7 August showed a 27% reduction in net debt over H1. According to Glencore, an additional fall of $0.3bn would enable the resetting of its debt cap.
This would allow for the recommencement of top-up returns to shareholders as early as February 2025.
Such special dividends were a feature from 2020 to 2022 inclusive, with the latter one being for 8 cents (6p) a share. That brought the total dividend up to 52 cents, which gave a yield at the time of 9.3%.
The present yield of Glencore stock is 2.4%.
Will I buy the shares?
So tempted am I to buy the stock that I have considered selling another of my commodity shares to make way for it.
Ultimately, though, these were bought at much lower prices than now and have good yields. So, I am happy with them and cannot add another as it would unbalance the risk-reward profile of my portfolio.
However, if I did not have them, I would buy Glencore today with no hesitation whatsoever. In my view, it looks set for excellent earnings growth that should power its share price and dividend much higher.
