Is Anglo American Undervalued Despite Its Analyst Rating?

Its shares falling by -5.5% today, Anglo American seems to be confirming what most analysts are saying about the stock. Despite its average rating of hold, might the stock be attractive to long term value investors? Let's unpack some of the company's fundamentals to find out.

Let's start our value analysis with the price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's liquidation value.

Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Anglo American is 1.3, compared to its sector average of 1.86 and the S&P 500's average P/B of 2.95.

The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 15.55 divided by either its trailing or forward earnings, which for Anglo American are $2.86 and $0.75 respectively. Based on these values, the company's trailing P/E ratio is 5.4 and its forward P/E ratio is 20.7. By way of comparison, the average P/E ratio of the Basic Materials sector is 8.57 and the average P/E ratio of the S&P 500 is 15.97.

Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Anglo American's ability to meet its debt obligations is an important aspect of its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 1.275. Since NGLOY's quick ratio is higher than 1, its total liquid assets are sufficient to meets its current liabilities.

One last metric to check out is Anglo American's free cash flow of $5,347,250,176. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Anglo American to keep paying its 14.7% dividend.

The market may be punishing Anglo American today, but many investors will be seeing this as an opportunity to pick up shares at a discount. Despite the lack of enthusiasm from analysts, this stock may hold some potential for patient investors. If you enjoyed this article, don't forget to subscribe to our free newsletter to receive our daily research on U.S equities!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.