Near a 52-week low, is Rio Tinto the FTSE 100’s best value stock?
Value stocks are companies that have relatively cheap valuations compared to their earnings and long-term growth potential. After a big fall, I think there’s a strong case to be made that Rio Tinto (LSE:RIO) shares are undervalued today.
The company’s one of the world’s largest mining conglomerates with operations spanning iron ore, aluminium, copper, and minerals. China’s ailing economy and falling commodity prices have hurt the FTSE 100 stock recently, but a quality portfolio of assets bodes well for its long-term future.
So let’s explore the outlook for the Rio Tinto share price and whether this could be a good opportunity for me to buy cheap shares today.
Headwinds
There are good reasons to exercise caution regarding Rio Tinto shares. The company’s half-year results were disappointing.
Revenue fell 10% to its lowest level in three years, to $26.7bn, and underlying EBITDA slumped 25% to $11.7bn. In addition, the balance sheet took a turn for the worse as net debt widened by $200m to reach $4.4bn. There was a big blow for passive income seekers too. The company’s proposed dividend of $1.77 represents a 34% fall.
A major reason behind the poor performance is the decline in iron ore prices, considering the company’s the world’s largest producer. The raw material accounts for around 77% of Rio Tinto’s underlying cash profits.
China is the largest source of demand, accounting for around 70% of all iron ore imports. Fears over the health of the world’s second-largest economy have hurt the Rio Tinto share price. They could continue to do so.
Rising youth unemployment, a sluggish construction sector, and the growing probability of a deflationary spiral in China all point to difficult near-term trading conditions for the mining giant.
Taking the long view
However, despite the doom and gloom, there are reasons to be optimistic about the long-term outlook for Rio Tinto shares. The company’s Pilbara network of 17 mines in Western Australia arguably has an equivalent importance to the global iron ore industry as Silicon Valley has to technology. Plus, it’s located in a stable, democratic jurisdiction — often a rarity for commodity operations.
If China manages to revive its economic fortunes, Rio Tinto’s iron ore portfolio is well-placed to benefit. Beijing’s launching fiscal and monetary stimulus programmes, which could mark a turnaround. There’s a real possibility that rumours of the country’s demise could be exaggerated.
Moreover, the company’s making strides to diversify away from iron ore. It has already developed asset strength in aluminium and copper. Lithium is the next metal in its crosshairs. The business is exploring the Jadar deposit in Serbia — Europe’s largest greenfield lithium project.
Should I buy Rio Tinto shares?
I already own a stake in Rio Tinto. My position’s in the red, but I think there’s a good chance the company has entered value stock territory. Although there are considerable risks to bear in mind, the firm’s forward P/E ratio of 8.1 implies better value than the FTSE 100 index as a collective.
Further volatility wouldn’t surprise me, but today looks like an attractive opportunity to buy more shares. When the time comes for me to rebalance my portfolio, Rio Tinto will be near the top of my list of stocks to buy.
The post Near a 52-week low, is Rio Tinto the FTSE 100’s best value stock? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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- Rio Tinto shares are down 19% in 6 months. Is this a great buying opportunity?
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Charlie Carman has positions in Rio Tinto plc. 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.
