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Earnings look ahead: Glencore

Glencore have beefed up their balance sheet but the company is still facing tough times in the commodity industry.

Glencore will announce its full-year figures on 1 March, and traders are expecting revenue of $165 billion and adjusted net income of $1.16 billion. These forecasts equate to a 25% fall in revenue and a 72.8% drop in adjusted net income. The firm will also report its second-half numbers on the same date, and investors are anticipating revenue of $72.99 billion and adjusted net income of $582 million, which compares with the first-half revenue and adjusted net income of $85.7 billion and $882 million respectively.

Glencore has been at the eye of the commodity storm and the stock received a battering by the markets when commodity prices crashed. The subsequent questioning of its finances put an enormous amount of pressure on the company. The mega miner reacted by suspending its dividend and undergoing an extensive asset stripping scheme and confirming its credit lines.

Investors certainly have more confidence in the company but the fact still remains it is engaged in a sector which is facing major challenges. The fundaments of the mining industry haven’t changed; there is a considerable amount of oversupply in the metals market and demand is weak, and this continues to be a problem for Glencore even if it’s balance sheet is stronger now than it was in August.

Earnings vs estimates
Out of the past four full-year announcements the revenue figures exceeded expectations 75% of the time, and the earnings per share (EPS) number topped the forecast 50% of the time. We can expect volatility on the day the figures are revealed as the share price has moved an average of 3.65% on the day of the announcement, but only 50% of the moves have been positive.

Glencore Revenue chart

There is limited correlation between the revenue performance and the share price movement on the day of the figures being released.

Glencore EPS chart

There is also limited correlation between the EPS performance and the share price movement on the day of the numbers being reported.

Beware of low valuation

  12 month trailing price/earnings 12 month forward price/earnings Price/book value Dividend yield
Glencore N/A 19.55 0.48 N/A
BHP Billiton N/A 66.48 0.92 8.27%
Anglo American N/A 28.33 0.40 5.41%
Rio Tinto N/A 19.15 1.28 7.85%
FTSE 100 28.5 15.13 1.6 4.72%

 

Glencore’s forward looking price to earnings ratio is at a respectable level for the sector and the low price to book value suggests the company is very much undervalued even by the commodity sector’s standards. Traders should be cautious of a low price to book value as it reflects the low expectations investors have for the business. Glencore’s lack of dividend is not unusual for the industry as Anglo American has also suspended its dividend. Rio Tinto and BHP Billiton have lowered their cash pay-outs to shareholders recently, but at least they are still paying dividends. 

Banks are bullish

  Buy ratings Hold ratings Sell ratings
Glencore 18 7 4
BHP Billiton 10 13 6
Anglo American 2 12 16
Rio Tinto 18 6 6

 

Equity analysts are very bullish on Glencore as it has the highest percentage (62%) of buy recommendations attached to it from the list of mining companies above. Investment banks have an average target price of 125p for Glencore, which is 4.5% below the current price.

Year-to-date Glencore’s share price is up 31% but the stock lost nearly 70% of its value in 2015. Form a short-term point of view, the stock is clearly in an upward trend and 118p is currently acting as support, and should that level be held additional gains are likely. The next big resistance levels on the horizon are 123p, 133p and 139p on the horizon. The longer-term outlook for Glencore is still bearish, and since listing in 2013 the stock has been pushing lower, and while the share price remains under 151p we can’t rule out another decline. If there is an hourly close below 118p it would be a bearish indicator and the next major support levels in sight are 106p and 95p.

Glencore chart

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