Earnings look ahead: Rio Tinto

The mega miner is suffering at the hands of falling commodity prices, but it is still paying a respectable dividend for now.

Mining
Source: Bloomberg

Rio Tinto will reveal its full-year earnings on 11 February, and traders are anticipating revenue of $34.36 billion and adjusted net income of $4.65 billion. These forecasts represent a 23% fall in revenue and 50% drop in adjusted net income.

The company will also report its second-half numbers on the same date, and investors are expecting revenue of $17.26 billion and adjusted net income of $1.44 billion, and that compares with the first-half revenue and adjusted net income of $17.89 billion and $2.92 billion respectively.

Rio Tinto is feeling the pain of the commodity rout, and the collapse in the price of metals has hit the miner hard. Revenues and profits are dropping as the underlying metal prices remain weak. Like many in its sector, Rio Tinto has had to pull back on capital expenditure and reduce costs as cash has become very valuable for companies in the commodity space.

The company is keeping its shareholders happy by continuing to pay a healthy dividend, which is no longer a certainty for companies in the same industry. The big question will be how long it can maintain its dividend while commodity prices keep crumbling. Even well financed firms get dragged lower in a downturn, and while the metals market outlook is gloomy so is Rio Tinto’s. 

  12M trailing price/earnings 12 M forward price/earnings Price/book value Dividend yield 5 year dividend growth
Rio Tinto Ltd 14.55 9.33 0.99 10.18% 20.82%
BHP Billiton 14.13 54.14 0.75 14.44% 7.58%
Glencore N/A 14.52 0.36 0% 0%
Anglo American N/A 5.77 0.24 0% 0%
FTSE 100 26.73 15.21 1.69 4.45% N/A

 

Rio Tinto’s low price to earnings ratio indicates it is undervalued when compared with the broader market, and the book value to price figure confirms this. The decline in forward-looking price to earnings ratio points to an increase in future earnings. Rio Tinto’s book valuation to price is by far the highest of the mining companies listed above, but it also has a respectable dividend yield and dividend growth rate.

Glencore and Anglo American are trading well below their book value, but both companies suspended their dividends in order to conserve cash.

Earnings vs estimates

Out of the past eight full-year results from Rio Tinto, the company exceeded the revenue forecast 50% of the time, and it topped the EPS estimate 75% of the time. Volatility can be expected on the day of the announcement, and on average the stock has moved 2.74%, but only 50% of the price reactions have been positive. 

EPS

There is strong correlation between the EPS performance and the share price movement after results have been released. 

rev

There is a limited correlation between revenue performance and the share price movement after the figures are announced. 

Brokers are buyers

  Buy ratings Hold ratings Sell ratings
Rio Tinto 19 7 5
BHP Billiton 12 12 6
Glencore 19 9 2
Anglo American 3 11 16

 

Equity analysts are very bullish on Rio Tinto. The stock has the second-highest percentage (61%) of buy ratings attached to it, and also has the second lowest percentage (16.1%) of sell recommendations. Investment banks have an average price target of £22.29 for Rio Tinto, which is 39% above the current price.

Year-to-date Rio Tinto has lost 18% of its value, but the share price has been rangebound (£17.64 - £15.56) since mid-January, and it is now near the lower end of the range. A close below £15.56 (2016 low) would be a bearish signal and the next major support levels will be £15.07 (March 2009) and £13.23 (March 2009).

Any rallies will encounter resistance at the 100-hour simple moving average (SMA) at £16.58, and if we see an hourly close above that metric it would be a bullish indicator with £17.64 the next major resistance level in sight. Should we see an hourly close above £17.64, it would be a positive signal and £18.50 will be the next big resistance level on the horizon. 

rio

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