Industrial Metals & Mining company Rio Tinto Plc is standing out today, surging to $55.23 and marking a 3.5% change. In comparison the S&P 500 moved only -0.1%. RIO is -21.31% below its average analyst target price of $70.19, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Rio Tinto Plc shares have outperformed the S&P 500 by 2.5%, with a price change of -13.9%.
Rio Tinto Group engages in exploring, mining, and processing mineral resources worldwide. The company belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.
Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles -- but accurately predicting where we are presently in the economic cycle is a matter of intense debate.
Rio Tinto Plc's trailing 12 month P/E ratio is 5.0, based on its trailing Eps of $10.96. The company has a forward P/E ratio of 13.1 according to its forward Eps of $4.21 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the basic materials sector has an average P/E ratio of 8.57, and the average for the S&P 500 is 15.97.
To better understand the strength of Rio Tinto Plc's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
RIO's average gross profit margins over the last four years are 41.0%, which indicate it has a potential competitive advantage in its market. These margins are steadily increasing based on their four year average gross profit growth rate of 12.2%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Rio Tinto's last four annual reports, we are able to obtain the following rundown of its free cash flow:
- 2021 free cash flow: $17,961,000,000.00
- 2020 free cash flow: $9,686,000,000.00
- 2019 free cash flow: $9,424,000,000.00
- 2018 free cash flow: $6,391,000,000.00
- Average free cash flow: $10,865,500,000.00 %
- Average free cash flown growth rate: 45.2 %
- Coefficient of variability (the lower the better): 45.7 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in RIO have received an annualized dividend yield of 12.7% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Rio Tinto has a P/B ratio of 1.8. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Basic Materials sector, which stood at 1.86 as of the third quarter of 2022.
Rio Tinto is by most measures undervalued because it has a very low P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because it has a no published PEG ratio, yet consistently strong gross margins. We hope you enjoyed this overview of RIO's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.