How Much Can Vale Rise?

by Trefis Team
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Despite a 58% rise since the March lows of this year, at the current price of about $10 per share we believe Vale stock (NYSE: VALE) still has some upside potential. Vale’s stock has rallied from $6.58 to $10.40 off the recent bottom compared to the S&P 500 which increased 36% during the same period. The stock was able to beat the broader market in the last 3 months as iron ore prices rebounded and started to rise since April. With the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat, and with the Chinese economy opening up, which led to expectations of a rise in iron ore demand and reduction of supply constraints.

With the stock still about 21% below the levels seen at the end of 2018 and 2019, we think it still has potential to rise further despite a strong recovery over the last 3 months. Our dashboard What Factors Drove -15% Change In Vale Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price rise between 2017 and 2019 is justified by the 10.6% growth in Vale’s revenues, from $34 billion in 2017 to $37.6 billion in 2019. This was driven by a rise in iron ore and pellet prices along with increased production. Though Vale reported losses in 2019 due to remediation expenses related to the Brazilian dam accident in early 2019, revenue continued to rise due to the rise in global iron ore prices on account of lower supply. With shares outstanding remaining stable, revenue per share also increased by 10.6% during this period. At the same time, P/S multiple also remained almost flat.

The entire drop in stock price of the last three years came about in 2020, with the P/S multiple dropping from 1.8x at the end of 2019 to about 1.4x currently. This was due to the impact of the pandemic which led to a drop in iron ore prices, thus leading to expectations of lower revenue. We believe that Vale’s P/S multiple has the potential to rise back to its historical level, which provides an upside to the stock price.

What’s the likely trigger for an upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The iron ore demand from industry players affects global iron ore price levels, in turn impacting the company’s price realization for its products. Lower demand from construction players and shedding of capacity by major steel companies, mainly in China, has led to a drop in global iron ore prices recently. Additionally, the lockdown is affecting the global supply chain for companies like Vale which have operations spread across geographies, leading to a decline in production and shipments.

This was confirmed to a certain extent in the company’s Q1 2020 results, where revenues declined 15% y-o-y and 30% sequentially (vs Q4 2019). But Vale’s Q2 2020 results are likely to reflect a better picture of the crisis. However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become more important in finding value.

With iron ore prices already on an upswing, Vale’s is expected to get back to the trajectory of revenue growth from 2021 onward. Additionally, with all major expenses related to the dam accident behind it, the company is expected to see healthy revenue and earnings growth in a post-Covid scenario. As per Vale valuation by Trefis, we have a price estimate of $11 per share for Vale’s stock, higher than its current market price.

While Vale’ stock price is likely to rise post-Covid, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the iron ore space, here’s how Vale compares with Cleveland-Cliffs.


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