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Welcome to this 12th post of investing, not rocket science! Investing Doesn't Have to Be Rocket Science: Our Non-Expert Guide to Portfolio Management.
Markets turned negative on Wednesday lead by "accounting issues" at Credit Suisse. Financial stocks have taken a beating and the investment portfolio has 7% exposure to it.
However since the portfolio is 40% in cash and 35% in Govt bonds, I am going to ignore the noise for a few days and re-look at this in the next post.
Today, I am going to evaluate these stocks from the Mining Industry: Glencore, BHP Group, Rio Tinto, Nippon Steel, Tata Steel and U.S. Steel.
Why mining stocks? These are some of the advantages: It offers exposure to commodities and provides diversification from other sectors (such as Tech, Financials and Healthcare). It could provide a hedge against inflation. If inflation becomes persistent and commodity prices rise, it could potentially increase profitability of these entities. There are disadvantages: the stocks could be more volatile, sensitive to government regulations, geopolitical risks and could be adversely impacted by slowing economic activity.
Company Financials:
Glencore's revenue is larger than the other five stocks put together.
Revenue to MarketCap multiple: Glencore and US Steel (0.3x) are better priced followed closely by Nippon Steel (0.4x) and Tata Steel (0.5x).
US steel has the highest earnings yield (43.8%), followed by Glencore (25.1%) and Nippon Steel (23.9%).
BHP and Rio Tinto have the highest Unlevered free cash flow margins, while Tata steel has the lowest.
Valuations, Efficiency and Volatility:
Operating income margin highest for BHP (46%) and Rio Tinto (39%), lowest for Glencore (9.3%).
Glencore and BHP are the only two stocks with a positive PEG ratio.
Realized volatility in the range of 28 to 54% for all stocks.
Price / Tangible book lowest for Nippon Steel and US Steel (0.7x), followed by Tata steel (1.2x) and Glencore (1.6x)
Debt / Equity lowest for Rio Tinto at 24.5% and highest for Tata Steel at 81.4%
Trends in Company Financials
Revenue growth trends similar for all six stocks, led by Glencore at 25.6%
BHP (46.3%) and RIO (39.5%) have maintained leadership in Operating Income margin over the last 5 years. Glencore has a stable trend in operating income margin, however it is the lowest (9.3%) among the stocks we are evaluating today.
Earnings yields are mostly stable for all stocks, with the exception of US Steel.
Capital Expenditure margins are currently between 4.3 and 12%
Interest expenses are likely to remain elevated over the next few years, however no concerns seen in the trends at this time.
Unlevered free cash flow: BHP and RIO maintain a lead over the rest, followed by US Steel and once again, Glencore, although relatively low at 3.7%, sees less volatility in trends over the last 5 years.
Inventories (not in the graphs), at about 11% of revenue, with Nippon steel with high inventories (27%).
Fair value and upside potential
Two methods for valuation used here: Discounted Cash Flow analysis and Analyst targets. The targets set by analysts could be subjective to their individual bias to the sector or stock, while the DCF model is an objective method. Both are important and an average of the two usually provides a fair assessment.
On average, Glencore offers the most upside potential from these two perspectives followed by Rio Tinto, Nippon Steel and US Steel.
Summary:
Based on valuations, earnings yield and stable efficiency, I am going to add Glencore (~3% exposure) and US Steel (~1% exposure) to the portfolio. Glencore has a large portfolio and cant be ignored. US Steel has under-perfomed, however with it may benefit as manufacturing in the US increases.
On the charts, US Steel continues to trade at multi year lows while Glencore is trading at its 2022 lows. Portfolio action: Buy Glencore and US Steel. Add Rio Tinto, BHP Group, Nippon Steel and Tata Steel to the watch-list.
Thanks for your time!
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