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Santanu Roy

1 Stock That Stands to Benefit From a Potential Chinese Stimulus

Despite concerns regarding the macroeconomic impact of interest rate hikes by the Federal Reserve and other major central banks, prices of iron ore and other minerals have recovered recently.

The key driver behind the recovery is the softening stance of the Chinese leadership on its Covid restrictions in the wake of the collateral damage to the domestic economy and the consequent civil unrest.

Sentiments have been further boosted by news of a rescue package for ailing Chinese developers to ease their liquidity strains and revive home purchases. Despite the rapid spread of COVID-19 due to the sudden relaxation restrictions, China’s leaders are likely to map out more stimulus steps as they meet behind closed doors at the annual Central Economic Work Conference.

This bodes well for the London-based mining and metals company Rio Tinto Group (RIO). The company is involved in the exploration and production of materials that form the backbone of the global economy through four segments: Iron Ore; Aluminum; Copper; and Minerals.

RIO has increased its revenue, EBITDA, and net income during the past three years at 13.4%, 16.6%, and 9.7% CAGRs, respectively.

During the first half of the fiscal year, RIO delivered solid financial results with underlying EBITDA of $15.6 billion, free cash flow of $7.1 billion, and underlying earnings of $8.6 billion. As a result, the company was able to pay out 50% of its earnings as an interim dividend of $4.3 billion, the second highest in its history.

RIO’s dividend payouts have grown at a 23.7% CAGR over the past five years. It has a 4-year average dividend yield of 10.5%.

Let’s closely examine the factors that make it worthy of investment.

Positive Recent Developments

On December 16, RIO announced the completion of its acquisition of Turquoise Hill Resources Ltd (TRQ) for an approximate consideration of $3.1 billion. With this acquisition, RIO would simplify its ownership of the world-class Oyu Tolgoi mine in Mongolia, significantly strengthening Rio Tinto’s copper portfolio and demonstrating its long-term commitment to the project and Mongolia.

On December 6, RIO announced its collaboration with OZ Minerals and Boliden to unlock innovative technologies for managing tailings. This joint effort would improve safety in the mining industry while eliminating, minimizing, reusing, or finding value in mine tailings that were previously considered waste.

On December 1, RIO completed the Kemano T2 hydropower project by commissioning a second tunnel to carry water into the Kemano Powerhouse in British Columbia. According to company estimates, the project contributed approximately $850 million to the BC economy and employed around 340 people at its peak.

Impressive Price Action

RIO’s stock is trading above its 50-day and 200-day moving averages of $63.51 and $64.72, respectively. It has gained 7.6% over the past month and 8% over the past year to close the last trading session at $70.63.

Discounted Valuation

In terms of forward P/E, RIO is currently trading at 8x, 35% lower than the industry average of 12.31x. The stock’s forward EV/EBITDA multiple of 4.63 is 34.8% lower than the industry average of 7.11. Also, its forward Price/Cash Flow multiple of 6.34 is 12.6% lower than the industry average of 7.26.

Higher-than-industry Profitability

RIO’s trailing 12-month gross profit margin of 43.46% is 41% higher than the industry average of 30.82%. The company’s trailing 12-month EBITDA and net income margins of 46.65% and 29.39% are 128.3% and 230.9% higher than the industry averages of 20.44% and 8.88%, respectively.

In terms of the trailing 12-month ROCE, ROTC, and ROTA, RIO also surpasses the industry averages of 13.39%, 7.43%, and 5.62% by 155.1%, 182%, and 208.9%, respectively.

POWR Ratings Reflect Stable Prospects

RIO has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RIO has a B for Value and Quality, consistent with its attractive valuation and impressive profitability metrics.

RIO is ranked #8 of 35 stocks in the B-rated Industrial – Metals industry. Click here to access additional POWR Ratings for RIO’s Growth, Momentum, Sentiment, and Stability.

Bottom Line

Given its high profitability and attractive valuation, RIO’s stock appears to be a smart buy now to capitalize on its potential upside from the Chinese economy opening its borders after prolonged isolation.

How Does Rio Tinto Group (RIO) Stack up Against Its Peers?

RIO has an overall POWR Rating of B, equating to a Buy rating. Check out its peers with an A (Strong Buy) or B (Buy) rating: Anglo American PLC ADR (NGLOY), BHP Group Limited (BHP), and Marubeni Corporation (MARUY).

RIO shares were trading at $71.25 per share on Thursday morning, up $0.62 (+0.88%). Year-to-date, RIO has gained 18.54%, versus a -18.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.


1 Stock That Stands to Benefit From a Potential Chinese Stimulus
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