2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Rio Tinto (LSE: RIO) (NYSE: RIO.US) — whose share price is up 124% on five years ago — still offer good value.
Back to basics
Rio’s share price has performed strongly over the last five years, but the mining giant’s shares are down by 13% this year, following last year’s loss-making performance.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Rio Tinto shares, we need to ignore historic price movements and focus on what we can get for our money today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | n/a |
| Trailing dividend yield | 3.4% |
| Operating margin | -5.6% |
| Net gearing | 49% |
| Price to book ratio | 1.74 |
Rio’s losses last year mean that it’s not possible to provide a trailing P/E, but if you strip out Rio’s $14.7bn impairment charge from last year, which was only a paper loss, then it would have delivered an operating margin of 25% in 2012.
Rio has taken its medicine
Rio’s former chief executive, Tom Albanese, fell on his sword in January, after the firm was forced to take $14.4bn of impairments on its Alcan aluminium business and its coal assets in Mozambique.
His replacement, Sam Walsh, has done a good job of refocusing the business on its core, profitable activities, in my opinion. Walsh has managed to accelerate the expansion of Rio’s high-margin Pilbara iron ore operations, as well as bring the firm’s giant Oyu Tolgoi copper-gold mine in Mongolia into operation, despite political problems.
Walsh has also overseen $1.9bn of divestments so far in 2013, and current forecasts suggest that Rio will report earnings per share of $5.03 per share for 2013, before delivering further growth in 2014:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 9.4 |
| 2014 forecast yield | 3.6% |
| 2014 forecast earnings growth | 11.7% |
| P/EÂ to earnings growth (PEG) ratio | 0.8 |
I think these figures suggest that Rio’s shares are currently seriously cheap and could deliver big gains in 2014 — as a shareholder, I’m holding and may add more at current prices.