Rio Tinto (LSE: RIO) (NYSE: RIO.US) is a company I’ve been bullish on for a long time, mainly because I am keen on its large exposure to China via its dominant iron ore business.
So, I’m always on the lookout for a good time to pick up more shares and I believe that moment is now.
Indeed, Rio Tinto currently trades on a price-to-earnings (P/E) ratio of just 10.5 using 2013 earnings per share. This compares very favourably to both the FTSE 100 and to the wider basic materials industry group, which trade on P/Es of 15 and 11.2 respectively.
This discount to both the market and the industry group is, in my view, wholly unjustified. Therefore, I firmly believe that shares will be rerated upwards as the market realises that Rio Tinto is a quality operation that is exposed to what are still the fastest growing regions in the world.
Furthermore, Rio Tinto benefits from extremely high barriers to entry — this is another major reason why I’m bullish on the company’s prospects.
Certainly, the product it sells is not unique: metals sold by Rio Tinto are usually little different to those sold by another mining company. However, Rio Tinto has some of the most accessible and, crucially, politically subdued mines in the world, with many of its operations being based in relatively stable countries such as Australia.
In my view, such stability means that Rio Tinto deserves to trade on a premium to its industry group rather than the aforementioned discount.
In addition, Rio Tinto’s share price chart looks favourable, with shares enjoying a strong run since their June lows of £25.80.
Indeed, shares have performed well and have strengthened in recent weeks although they remain towards the lower end of their medium term trading range of £30-£40. Therefore, I am optimistic that they will continue to tick up over the months and years ahead.
So, I’m bullish on Rio Tinto and am thinking of adding to my current holding because, quite simply, I feel it is grossly undervalued at current price levels.
As well as trading at a discount to its industry group and the index based on the P/E ratio, Rio Tinto continues to benefit from high entry barriers as well as a chart that indicates further upside.