Glencore’s (LSE: GLEN) share price has fallen 37% over the last year for two key reasons, in my view.
The first is market pessimism over the economic prospects of the world’s largest importer of commodities – China.
The second is unease over how the US’s trade relationship with the country develops.
In my view, both factors remain risks for the share price in the short term. However, over the long term, I believe neither bearish element looks set to endure.
Consequently, the stock could offer a classic short-term risk/long-term reward play.
How does the economic backdrop look?
China reached its 5% annual economic growth target last year. It has the same target this year and Q1 saw it hit the 5.4% mark.
I think the markets forget just how huge even a more modest economic expansion would be in monetary terms.
Specifically, the gross national product (GNP) of investment darling India in 2024 was $3.9trn. For China, it was $18.6trn. GNP is the total value of goods produced, and services provided by a country for one year.
Therefore, even a 4.5% economic expansion in China would be the equivalent of adding an economy the size of India’s to its own every four-and-a-bit years.
It is this that drives its demand for the oil, gas, and metals in which Glencore is a major player.
Meanwhile, the US has already reduced the tariffs imposed on China on 2 April from 145% to 30%. I think it unlikely that such protectionism towards its key trading partners will remain a long-term US policy.
Is the business poised for growth?
Glencore’s 2024 results saw adjusted earnings before interest, taxes, depreciation, and amortisation fall 16% year on year to $14.358bn (£11.36bn).
That said, consensus analysts’ estimates are that its earnings (or ‘profits’) will rise a spectacular 47% a year to end-2027.
And it is ultimately growth here that drives any firm’s share price and dividends higher.
I believe a key catalyst for such expansion will be the full integration of Elk Valley Resources bought by Glencore last July. This builds on its plans to expand its carbon steel presence with an eye on China’s renewable energy infrastructure plans.
I think another is its aim to increase its copper production to one million tonnes by 2028 (from 2024’s 951,600 tonnes). The firm has also indicated that it is looking at doubling this output after that. Copper remains a key metal in construction and industrial machinery, as well as in the energy transition.
Do the shares seem like a bargain?
Glencore’s 1.2 price-to-book ratio looks very cheap against its peers’ average of 2.2. This group consists of Anglo American at 1.6, Rio Tinto at 1.7, Antofagasta at 2.7, and BHP at 2.8.
A discounted cash flow analysis shows the stock is 22% undervalued at its present £3.06 price.
Therefore, its fair value is technically £3.92.
A further boost could come from the $1bn share buyback announced on 7 July. These tend to support share price gains.
Will I buy the stock?
I have other stocks in the commodities sector, so buying another would unbalance my portfolio.
However, given its strong earnings prospects, I think the stock is well worth the consideration of investors whose portfolios it suits.
