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Earnings: are Glencore shares bargains hiding in plain sight?

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Glencore (LSE: GLEN) shares have been a good buy pretty much every day since 23 March 2020. That was when the stock bottomed out at around 110p, as the pandemic triggered a major market crash.

Since then, a series of global events have left commodities such as coal and oil trading at near-record prices. Glencore has benefited from this demand and has just reported record profits for 2022.

Mining is a cyclical business. Record profits always make me question whether a downturn is likely. However, I can still see plenty of drivers for strong earnings in this sector. In this piece I’ll review Glencore’s latest results and explain what I’d do with the shares today.

Record results: profits up 250%

2022 was a very good year for Glencore. The group’s revenue rose by 26% to $256bn. After-tax profit for the year climbed a staggering 250% to $17.3bn, from $5bn in 2021.

These bumper results can largely be linked to one word — coal. Soaring coal prices lifted adjusted cash earnings from the company’s coal production. They rose by $12.7bn to $17.9bn last year.

Looking at the bigger picture, operating profit from all aspects of energy — mining, trading, coal, oil and gas — rose by 353% to $21.1bn in 2022. This helped to offset a 37% fall in profits from metals and minerals, such as copper and zinc, where costs rose and production fell.

Shareholders were rewarded with $4.9bn in dividends and a $3.6bn share buyback.

Looking ahead to 2023, management plans to pay $5.6bn in cash dividends and to buy back $1.5bn of shares. That’s equivalent to a forecast dividend of $0.44 per share, giving the stock a forecast dividend yield of 7.1% today.

What are the risks in 2023?

Chief executive Gary Nagle says that high inflation and higher interest rates “present some risks to the economic outlook in 2023”. However, Mr Nagle thinks that China’s post-Covid reopening is likely to help support demand.

He also expects the global focus on decarbonisation and electrification to be positive for Glencore, due to demand for materials such as copper, nickel and zinc.

I think the outlook is fairly positive too. I don’t believe energy prices are likely to collapse this year. However, I feel investors shouldn’t expect a repeat of last year’s record profits.

Coal generated around 60% of Glencore’s operating profit last year. But coal prices have been falling sharply and have now returned to the level seen just before the Russian invasion of Ukraine.

What I’d do now

Unless something unexpected happens, I think Glencore’s profits are likely to fall sharply this year. Broker forecasts suggest profits could fall by around 30%. That seems about right to me, given what we know today.

These estimates put Glencore on a price-to-earnings ratio of six. That might seem cheap, but it’s worth remembering that it’s still based on exceptionally high profits. These may not be sustainable, especially if some major economies slowdown in 2023.

I expect the shares to provide strong dividend income this year. But I don’t think they’re a bargain buy today. In my view, there’s still plenty of good news priced into this stock. I think there will be better buying opportunities in the future.

The post Earnings: are Glencore shares bargains hiding in plain sight? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. 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.