Sep 24, 2020
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Rio Tinto Stock Overvalued After 70% Rise?

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The logo of Australian mining company Rio Tinto is display on the company s Shanghai offices on. [+] AFP VIA GETTY IMAGES Rio Tinto stock (NYSE: RIO) has seen a powerful rise of over 70% since late March (vs. over 55% for the S&P 500) to its current level of greater than $60

 

It is after falling to a low of almost $35 in late March as a rapid increase within the number of Covid-19 cases outside China spooked investors and led to heightened fears of an imminent global economic downturn. The stock is currently about 15% above its February 2020 high. Are the gains warranted or are investors too exuberant? We believe that the stock has risen and recovered slightly greater than its potential and it may drop marginally to settle around $60 within the near term

 

Our conclusion is based on our detailed comparison of Rio Tinto s stock performance in the course of the current crisis with that in the course of the 2008 recession in our dashboard analysis – Rio Tinto Stock s Recovery Has Gone Far. How Did Rio Tinto Stock Fare During 2008 Slowdown? We see RIO s stock declined from levels of around $90 in October 2007 (the pre-crisis peak) to little over $20 in March 2009 (as the markets bottomed out) – implying that the stock lost almost 75% of its value from its approximate pre-crisis peak

 

This marked a drop that was higher than the broader S&P which fell over 50%. However RIO s stock recovered strongly post the 2008 crisis to over $55 in early 2010 – rising greater than 140% between March 2009 and January 2010 as against the S&P which bounced back by about 50% over an identical period

 

In the course of the current crisis RIO s stock lost one-third of its value between 19th February and 23rd March 2020 and has already recovered greater than 70% since then. The S&P in comparison fell by about 35% and rebounded by over 55%. PROMOTED UNICEF USA BRANDVOICE | Paid Program
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Show Me The Equal Money Where Is The Stock Headed? The outbreak and global spread of coronavirus caused lockdown in various cities across the globe which affected industrial and economic activity

 

Lower demand from construction players and shedding of capacity by major steel companies mainly in China has caused a drop in global iron ore prices. Additionally the lockdown has affected the worldwide supply chain for companies like Rio Tinto which have operations spread across geographies resulting in a decline in production and shipments

 

A drop in copper and aluminum prices is likewise hitting a diversified miner like RIO. This was evident from the recently released H1 2020 results where Rio Tinto s revenues declined by 7% to $19. 4 billion while net earnings were down by 20%. Though iron ore production was up it may not translate into higher revenues via a drop in price realization

 

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely calmed investor concerns concerning the near-term survival of companies. As the worldwide lock downs are lifted gradually iron ore demand is predicted to rise with supply constraints easing. It is more likely to result in an uptick in shipments toward the top of 2020

 

Global iron ore price has also increased since April from $80/ton to over $100/ton currently. Though the stock has increased significantly over the past 5 months the recent surge in Covid positive cases in several states in the US could prove to be an impediment for RIO. If the rise in cases warrant a re-imposition of lockdowns then the stock could see a sharp drop to as little as $50

 

Within the absence of another lockdown the stock could remain almost its current level with only a slight downside with Trefis estimating Rio Tinto s valuation to be $60 per share. In contrast here s how Vale s stock could look post Covid-19. Interestingly RIO s peer Cleveland-Cliffs stock plunged despite revenues being stable

 

What if instead you are looking for a more balanced portfolio? Here s a top-quality portfolio to outperform the market with over 100% return since 2016 versus 55% for the S&P 500 Produced from companies with strong revenue growth healthy profits quite a few cash and occasional risk. It has outperformed the broader market year after year consistently

 

See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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