Despite A Major Dam Accident In 2019, Is Vale Still Undervalued?

by Trefis Team
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Based on its current market price and future growth prospects, Vale (NYSE: VALE) looks undervalued at present. Trefis has a price estimate of $14 per share for Vale’s stock, higher than its current stock price of $11.30 (as of November 21, 2019), which reflects an upside of ~24%.

To understand the primary factors that are driving a higher stock price estimate for Vale compared to its current market price, view the Trefis interactive dashboard – Vale Valuation: Expensive or Cheap?

About The Company

  • Vale is the world leader in iron ore and iron ore pellet production and has access to the world’s largest nickel reserves.
  • Apart from iron ore and nickel, it also produces copper, coal, and other base metals.
  • Vale also operates a large logistics network in Brazil which includes railroad, maritime terminals, and a port.
  • China accounts for about 50% of its iron shipments whereas Asia as a whole accounts for 70%.
  • Vale’s primary competitors are Cleveland-Cliffs, Rio Tinto, and BHP Billiton.

Estimating Total Revenues

  • Vale’s total revenues have increased from $27.5 billion in 2016 to $36.6 billion in 2018, adding over $9 billion to its revenue base in just two years.
  • However, revenue growth over the next 2 years is expected to remain subdued (compared to the 2016-2018 period), with Vale projected to add close to $2.5 billion in revenues by 2020, as benefits of premium pricing of pellet and iron ore, along with higher copper prices are expected to be partially offset by iron ore production cuts in 2019.
  • After a strong growth in 2018, shipments are expected to decrease in 2019 due to production cuts following the Brazil dam accident in January 2019.
  • China’s recent iron ore restrictions (only ores with minimum iron content of 62% are to be used in China) to mitigate environmental degradation, and higher demand from emerging markets, has led to premium pricing for Vale’s high-grade ores and pellets.
  • However, iron ore and pellet revenue is expected to see a drop in 2020, driven by faster than expected ramp up in global supply and falling demand from China due to a slowing economy.

To understand revenue growth in Vale’s nickel, copper, and other revenue segments, refer to the Trefis analysis- Vale Revenues: How Does Vale Make Money?

Estimating Net Income

  • Net income margin is expected to increase from 18.8% in 2018 to about 21.5% in 2019, and further to 22% in 2020, supported by a decrease in interest outgo, lower currency headwinds, and premium pricing, partially offset by one-time additional expenses related to the recent dam accident, most of which have been recorded in Q1 2019, and a decrease in iron ore prices in Q3 2019.
  • Thus, higher revenue and margins would drive net income from $6.9 billion in 2018 to $8.5 billion and $8.6 billion in 2019 and 2020, respectively.

Estimating Earnings Per Share

  • EPS is expected to see a sharp rise from $1.32/share in 2018 to $1.65/share and $1.67/share in 2019 and 2020, respectively, driven by higher net income margins and share buybacks.
  • With Vale continuing with its share buyback program, the outstanding share count is expected to come down from 5.18 billion in 2018 to $5.15 billion in 2020.

Share Price Estimation

As per Vale Valuation by Trefis, we have a price estimate of $14 per share for Vale’s stock. The stock price estimate is arrived at using the discounted cash flow valuation technique, which you can find in the detailed financial model. Based on a projected EPS of $1.67/share and stock price estimate of $14/share, Vale’s forward price-to-earnings (P/E) multiple stands at 8.5x.

To understand how Vale’s P/E multiple compares with that of its peers, view our interactive dashboard analysis.


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