Is Rio Tinto plc Set For Electrifying Earnings Growth In 2014?

Royston Wild looks at Rio Tinto plc (LON: RIO)’s growth prospects for the new year.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in mining giant Rio Tinto (LSE: RIO) (NYSE: RIO.US) have oscillated wildly in 2013 — the stock strode to peaks of 3,757p in February, before shedding almost 30% in the space of a few months to hit their cheapest in almost four years as macroeconomic worries again hit investor sentiment.

The stock is currently down more than 10% since the start of the year, and I believe that an environment of worsening fundamentals in its key markets is set to drive the firm’s share price lower from next year and beyond as earnings crumble.

Earnings outlook hardly cast iron

In my opinion, Rio Tinto faces a confluence of price pressures as insipid demand weighs on commodity prices, particularly in the critical iron ore market. As Investec notes, the steel-making ingredient is now responsible for around 99% of the firm’s underlying earnings, surging from just 36% five years ago, partly as contribution from other divisions has nosedived.

Worryingly, the broker advises that “while iron ore [will] still deliver earnings growth, this is expected to be modest as the company’s planned increase in production volumes is offset by our forecast fall in iron ore prices.”  The broker expects excess supply in the iron ore market to weigh heavily on prices from 2014, and anticipates the average iron ore price to clock in at $122.5 per tonne next year versus $133 in 2013.

And the commodity is expected to continue sliding in coming years, with prices of $117.5 and $112.5 pencilled in for 2015 and 2016. In my opinion, a backdrop of increasing pressure on Rio Tinto’s key market, not to mention sustained weakness in other key markets such as aluminium and coal, severely undermines the company’s current earnings projections.

Following an expected 1% decline in earnings per share this year, to 306p, the City’s brokers anticipate a sharp 15% snapback in 2014 to 352p.

This expected recovery leaves Rio Tinto dealing on, at face value at least, more than reasonable P/E ratings of 8.8, comfortably underneath the value threshold of 10. And a price to earnings to growth (PEG) readout of 0.6 underlines the company’s appearance as an exceptional bang-for-your-buck stock — any reading below 1 is considered stunning value relative to its growth prospects.

Elevated risks could smash earnings outlook

Still, in my opinion the risks facing Rio Tinto over the next 12 months greatly outweigh the potential rewards, and I believe that the miner is in great jeopardy of severe earnings weakness in coming years. With the global economy remaining in a severely fragile state — as illustrated by recent OECD growth downgrades recently — I believe that the possibility of worsening demand could shatter earnings forecasts for 2014, a situation worsened by a swathe of new mining capacity hitting the market.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in Rio Tinto.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »