Rio’s desultory performance is a little puzzling unless one factors in a bearish assessment of commodity prices. It is down about a third since the middle of last year. Analysts have it on a 2013E earnings multiple of about 7-8 times, which is very low for a company that is large enough not to have significant investment risk. Especially as it now has an aversion to debt after its recent mistakes. Net debt to equity is 28% and return on equity is a healthy 18.9% according to Deutsche.
When combined with a prospective dividend yield of about 3%, one wonders why the bearishness? The direction of the iron ore price is important, and there is a hint in JP morgan lowering iron ore prices by 4% in 2012, and 10% in 2013, on the back of a weaker demand scenario.
But JP Morgan still has a buy and an aggressive price taregt of $84:
Despite taking the knife to our iron ore price forecasts, RIO still presents significant valuation upside. On this basis, we maintain our positive investment view, and Overweight recommendation. The critical near term issue for the sector remains the outlook for the EU sovereign debt crisis. As the problems in EU begin to stabilise, we expect sentiment to improve, and the miners to re-rate sharply.
Macquarie has an outperform and an $88 price target saying that even taking a conservative view of its Pilbara expansions, it is “comfortably” inexpensive on almost all valuation metrics:
Overall, iron ore sales were broadly in-line with no change to the 2012 outlook, while a strong copper performance more than offset disappointing coking coal production. Despite a solid overall production performance, a step jump 1H12 exploration charge of ~ U$1bn is likely to trim consensus earnings. Full year production guidance has been tweaked but with the exception of a 6% cut for met coal, there are no major divergences from our estimates.
Citi thought the result was a bit ordinary, but still has a buy and an aggressive price target:
“JQ12 production was generally below our estimates and guidance for a number of commodities has been lowered, but not iron ore which is the biggest earnings driver. We have made modest upgrades to our earnings forecasts with lower exploration expense offsetting lower production; and maintain our Buy rating and A$80 target.”
One has to worry when the analysts are agreeing. Of course, they’ll all be right barring a steep drop in iron ore prices, which doesn’t seem to have occurred to anyone.