This article has been written on 18th of October, by an expert contributor Layton Membrey from Marcus Today
Rio Tinto (RIO) has reported its third-quarter production numbers, with Pilbara iron ore shipments of 82.9Mt, coming in below consensus of 83.2Mt, and 1% lower than last year.
RIO lowered its full-year production guidance to the bottom end of the prior 320-335MT range, while cost guidance remained unchanged. RIO has warned of further downside risks to global demand, as consumer confidence wains and global economy slows.
This comes alongside a weakening iron ore price, which fell just under 24.5%, from $130 to $98 in the third quarter. Recent headlines from China surrounding the COVID policy sparked concerns about global demand and supply risk, which have clouded the iron ore outlook. Brokers have identified short-term headwinds and have adjusted price forecasts accordingly for metals prices but expect a rebound in the second half of 2023, from an easing in China and a pivot in the Fed policy from the second quarter of 2023. The average target price for RIO is $102.93, which indicates a 9.3% upside.
Fundamentals
RIO has an interesting fundamental picture, with EPS expected to fall in the next four years, although this comes after exceptional recent strength. Revenue growth is also expected to fall in each of the next four years. PE is set to increase steadily over the next four years, and the company is currently trading at a slightly lower-than-average 6.4x. The big number for RIO is its gross yield, which is down to 13.7% from 25.9% last year but is remaining elevated in the next four years. Dividend growth is expected to slip in the coming years, but the payout ratio is remaining around 60-65%, so there is still room to keep investors happy.
The chart doesn’t shed too much light on either side, with the share price basically where it was a year ago.
Conclusion
RIO is a play on the iron ore price and the Chinese economy. It is a volatile stock not a reliable stock. With the iron ore price at 3 year lows and trending down and with a lot of questions over the Chinese growth trajectory, RIO is trending down at the moment. It has been held rather dangerously by a lot of income investors who might now realise that the capital performance of RIO is more important than the yield. Its a volatile stock that has a yield. Not an income stock you can rely on. Its a great stock when the sector tide is rising but not so great now. There is a pivot point coming in resources one day but its not here yet and there is no reason to buy or hold in this weakness with headwinds blowing. Income investors beware, resources are only income stocks some of the time not all of the time. Forget the PE and yield. This trades on commodity prices each day not assessments of value on numbers which are historic. Respect the trend. The trend is not your friend. Some income investors might give up and come back when the tide is rising again. Banks are looking a lot more reliable again. Money makers will not bother until it turns.
More about the author – Layton Membrey
Layton Membrey has been working with the Marcus Today Stock Market Newsletter since 2021. He is currently undertaking a Master of Commerce specialising in Finance at Deakin University, which he will complete in 2023. Under the guidance and expertise of Marcus and Henry, he has been able to develop an investment style that reflects a combination of their technical and fundamental values.
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First published on 18th October 2022 on the Marcus Today website.