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Is the Glencore share price a buy or should I grab FTSE 100 faller Ferguson?

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Many cyclical stocks have fallen sharply over the last couple of months, as investors have taken a cautious view on global growth. Today, I’m going to look at two big fallers from the FTSE 100.

The first is mining and commodity trading group Glencore (LSE: GLEN). The group’s share price has fallen by 23% so far this year, leaving it lagging far behind rivals such as Rio Tinto (-7%) and BHP (+3%).

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One reason for this is that Glencore has been hit by a US Department of Justice investigation into its operations in the Democratic Republic of Congo. But the group’s financial performance has remained strong. I’m not sure the stock deserves such a big discount to rivals.

Too cheap to ignore?

Glencore’s recent trading results certainly suggest to me that this business is firing on all cylinders. During the first half of the year, adjusted operating profit rose by 35% to $5,119m. The group’s funds from operations — a measure of cash generation — rose by 8%, from $5,201m to $5,625m.

Market conditions are fairly favourable for most major commodities, and the firm’s management appears to have been taking advantage of this. Production of copper rose by 12% to 1,063,100 tonnes during the third quarter. Nickel, zinc and coal also logged increases.

Analysts expect earnings to rise by 20% to $0.49 per share in 2018, providing generous earnings cover for the forecast dividend of $0.21 per share. These forecasts put the stock on a 2018 price/earnings ratio of 7.8, with a 5.4% dividend yield. In my view, that’s cheap enough to factor in the risks faced by the firm. I’d rate the shares as a buy at this level.

Should I be worried?

The share price of FTSE 100 plumbing and building supplies group Ferguson (LSE: FERG) has fallen by about 20% since the start of October. This sharp sell-off seems to have been caused by wider market woes rather than by problems at the company, which was previously known as Wolseley.

In its first-quarter trading statement today, Ferguson said that sales rose by 8.5% to $5,554m during the three months to 31 October. Trading profit — a measure of operating profit — rose by 9.9% to $432m.

The group’s business is mainly focused on the US market these days, which provides more than 80% of sales. Although it’s early in the year, at this stage chief executive John Martin expects the firm’s full-year results to meet expectations for earnings growth of 18%.

There’s no obvious reason for concern. But Ferguson shares are down by nearly 4% at the time of writing, after this morning’s figures. As a shareholder, should I be worried?

A cyclical peak?

I’ve been impressed with this firm’s ability to generate high returns in a competitive sector. During the year to 31 July, Ferguson generated a return on capital employed of 20%. A similar figure seems likely this year.

However, it’s worth remembering that this is a cyclical business. Recent news reports indicate that US construction spending may be flattening, or even falling. In such a scenario, Ferguson’s profits could peak, and the company could see a period of slower growth, or reduced earnings.

Faced with an uncertain outlook, I think Ferguson shares are probably priced about right at the moment, on 12 times forecast earnings, with a 3.2% yield. There are probably better opportunities elsewhere.

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Roland Head owns shares of Ferguson. The Motley Fool UK has no position in any of the shares mentioned. 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.

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