At its current valuation, miner and commodities trader Glencore (LSE: GLEN) changes hands at only 10.8 times consensus forward earnings, which is far below the FTSE 100’s average valuation and comes with a hearty 3.75% dividend yield. But is this valuation just right or should yield-hungry investors snap up this opportunity to grab a growing, high-yield stock at a great price?
Well, that depends on the highly vague outlook for key commodities such as copper, zinc and nickel. The good news is that 2017 was a great year for miners of these metals and minerals as industry-wide under-investment in mines following the commodity crisis exacerbated already tight supply-demand relationships. And with global economic growth looking strong going into 2018, demand and prices for these products should only go one way – up.
Furthermore, unlike only two years ago when Glencore was having to sell assets to shore up its balance sheet, the group is now in rude health. EBITDA last year jumped 44% to $14.7bn, which helped bring net debt down to a very manageable $10.6bn. Its improved balance sheet and rising cash flow gave management the ability to increase annual dividend payments to $2.9bn and also plough $1.6bn into output expansion of key products such as cobalt and copper.
However, while Glencore is in very good shape, it can’t escape the highly cyclical and rapidly-changeable nature of its industry. Given its dependence on continued strong economic growth in markets such as China, where anything can happen, and quickly, I think Glencore’s current valuation is reasonable. That means it’s no bargain in my eyes, which it would need to be for me to invest in the miner at this stage of the economic cycle.
Time for contrarians to become greedy?
A deeper value natural resources option could be oil services provider Petrofac (LSE: PFC). The company’s stock has been battered over the past year due to oil & gas majors keeping capital investment budgets low, despite recent rises in oil prices as well as the news that Petrofac is under investigation by the Serious Fraud Office for potential bribery in relation to contract wins.
But now the dust is beginning to settle on this investigation as founder and CEO Ayman Asfari is back in his role. And he recently sank £10m of his own money into the company’s stock that takes his holding up to 18.79% of the total shares outstanding. This certainly suggests to me that insiders don’t lack for confidence in both the results of the SFO investigation as well as the group’s ability to continue successfully bidding on contracts.
This could make Petrofac an intriguing option, trading as it is at just 10.3 times consensus forward earnings. With this low valuation, shareholders also get a 4.5% dividend yield, a great competitive position in the group’s core market with Middle Eastern national oil companies, and consistent pre-impairment profits despite the downturn in oil prices.
That said, there is still reason to worry. The SFO could still come down hard on Petrofac and the recent admission in a capital markets day that competition in its core market is heating up does not bode well for the future. Petrofac is certainly looking cheap to me, but with these twin pressures hanging over its head, I won’t be buying its shares any time soon.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.