The following three companies are operating in the commodities field and are well-positioned in their respective businesses, exhibit attractive margins and are cheaply valued given the increasing uncertainty in the capital markets about global growth prospects. These companies are true heavyweights in the commodity industry with a strong footprint in source countries, strong capitalization and attractive upside potential in the long-term due to increasing construction activity in the emerging markets fuelling demand for commodities such as iron ore, bauxite, aluminum or zinc. Companies operating at the core of the value chain are set to profit from global growth and at the same time are confronted with a favorable supply/demand picture.
BHP sold about $75 billion worth of commodities and services last financial year. With a focus on Iron ore, diamonds, coal, natural gas, petroleum, aluminium, copper, uranium, nickel, gold and silver the company covers the most relevant commodities needed as industrial inputs. The company has a strong presence in the commodity hot spots Australia, Latin America, South Africa, the US and 20 other countries. BHP currently quotes at $63 and at the lower end of its 52 week trading range of $59.87-97.37. The company trades at a forward P/B of only 11.55 and at the same times exhibits an extremely attractive operating margin of 44% and a net profit margin of 31%.
The average earnings estimate for 2013 is $5.48 a share. With a multiple of 15 the company would more reasonably trade at $82.2 marking about 30% upside from the current share price. In addition, investors are going to pick up a decent 3.50% dividend yield on the way.
Rio Tinto (RIO)
RIO, like BHP, has a focus on Iron ore and prime industrial commodities needed for the construction and technology industry. I particularly like RIO's focus on Iron ore, bauxite, copper and aluminium which are in high demand. China primarily drives growth for these commodities. I also like RIO's very low valuation. RIO's sourcing footprint is international with heavy operations concentration in Australia.
RIO's 52 week trading range is $40.50-74.00. Like BHP, RIO trades at the lower range of its 52 range, making it comparatively cheap based on recent valuations. Analysts estimate 2013 earnings of $8.54 on average. With a forward P/E of 5.2x the company is very attractively priced given the quality of assets the investor can pick up on the cheap. Investors also get to pick up a 3.26% dividend yield. The company showed an operating margin of 38% and a net profit margin of around 10%. With a P/E of 5 RIO has room to grow valuation wise. I have a price target of $88 on the stock.
VALE is the third mining heavyweight, based in Brazil, with a market capitalization of $95 billion. VALE is operating worldwide and has a presence in nearly all important commodity source countries. I like VALE because of its market leading positions in Nickel, Iron ore and Manganese, three highly demanded inputs needed for the construction industry. In addition, VALE is highly profitable with an operating margin of 46% and a net profit margin of 33%. VALE pays a relatively high dividend, which currently yields about 6.3%. VALE is cheap with a forward P/E of only five giving investors an earnings yield of 20% which is truly astounding given the global long-term growth prospects. VALE should trade at a multiple of 15 given it an upside of 200%. I have a price target of $40 on the stock. VALE's 52 week trading range is $17.62-33.74. With $18.63 the company also trades at its lower bound, which is always a good sign to catch a relatively attractive price.
In my opinion, all three mining companies are hugely attractive based on the commodities they produce as well as their valuation. An earnings multiple of around five for one of the leading resource companies of the world at the heart of global growth is way too low. Investors also get to enjoy a decent dividend that is backed by sufficient cash flow. I rate each of the above three companies as a strong buy with a personal preference for VALE because of its insanely low valuation. Other stocks that I currently rate as a hold are Freeport (FCX), Peabody Energy (BTU) and Southern Copper (SCCO). I consider Potash (POT) and ConocoPhillips (COP) to be extremely attractive stocks as well and will follow up on them with a separate analysis.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VALE over the next 72 hours.