One thing that all investors have in common is that they would love to buy shares when they are low in price. Indeed, that’s the whole point of investing: buy low and sell high. However, sometimes it’s difficult to judge whether a company’s share price is temporarily low, or low for a good reason that is likely to keep it low for the long term.
In the case of Rio Tinto (LSE: RIO) (NYSE: RIO.US), its share price appears to be low and, more importantly, has the potential to go much higher. Here’s why.
Great Value
Despite its share price having risen by an impressive 8% during the last three months (while the FTSE 100 has fallen by 3%), Rio Tinto still offers good value for money. For instance, it currently trades on a price to earnings (P/E) ratio of 11.2, which is 15% lower than the FTSE 100’s P/E of 13.2. Certainly, Rio Tinto’s P/E ratio has been lower than its current level in recent months, but it still offers substantial scope for an upward revision as a result of improved company performance and better future prospects.
Strong Results
Indeed, Rio Tinto’s half-year results released last week were impressive. They showed an increase in the bottom line of 21% versus the first half of 2013. This is hugely encouraging for investors, since it shows that Rio Tinto is starting to turn its performance around after a number of disappointing years. In addition, its future prospects continue to improve, with the macroeconomic outlook of a key customer, China, continuing to get better after positive GDP and PMI data in recent months.
Future Growth
The potential impact of an upturn in demand for commodities, notably iron ore, can be seen in Rio Tinto’s growth forecasts. While this year is expected to show a decline in earnings per share (EPS) of 6%, as a result of what is expected to be a slower second half of the year than it was in 2013, 2015 could prove to be a whole lot better, with the bottom line expected to increase by 8%. This is well ahead of the growth rate of higher-rated sector peer, BHP Billiton, which again highlights the potential for an upward rerating to Rio Tinto’s valuation.
Looking Ahead
While the demand for metals and commodities is likely to fluctuate over the medium term, it appears as though Rio Tinto is starting to enjoy a more prosperous period than it has done in recent years. An encouraging set of results combined with an improved outlook for China mean that the future looks bright for Rio Tinto. With shares trading on an attractive valuation multiple, they could become your best value play.