Vale Recovers 70% But Hold On For 20% More Gains


Despite almost a 70% rise since its March lows of this year, at the current price of close to $12, Vale stock (NYSE: VALE) still looks undervalued. Vale’s stock has rallied from $6.58 to $11.77 off the recent bottom compared to the S&P 500 which increased 57% during the same period. The stock was able to beat the broader market in the last 7 months as iron ore prices rebounded sharply since April, with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. As the global economy opens up and supply constraints ease, iron ore shipments are likely to rise in the coming quarters. With the stock still about 11% below the levels seen at the end of 2018 and 2019, we believe it has the potential to rise almost 20% from its current level. Our dashboard What Factors Drove -4% 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 almost 11% rise in revenues during this period. Vale’s revenues increased from $34 billion in 2017 to $37.6 billion in 2019 due to 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 as lower shipments were more than offset by 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.

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The P/S multiple remained almost flat at close to 2x over this time. However, the multiple dropped in the beginning of 2020 due to the impact of the pandemic which led to a drop in iron ore prices, thus leading to expectations of lower revenue. The P/S multiple recovered over the last few months after stimulus measures were announced and currently stands at about 1.6x, still lower than its 2019 level. We believe the multiple will rise to about 2x in the near term as the crisis abates, leading to a higher stock price.

Upside Trigger?

The outbreak and global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. 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. Additionally, the lockdown has affected the global supply chain for companies like Vale which have operations spread across geographies, leading to a decline in production and shipments. This was evident in the Q2 2020 results, where Vale’s revenues declined 18% y-o-y. But the recent spike in iron ore prices helped the company’s revenues to rise over 5% in Q3 2020.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. As the global lock downs are lifted gradually, iron ore demand is expected to rise with supply constraints easing. This is likely to lead to an uptick in shipments toward the end of 2020. Global iron ore price has also increased since April, from $80/ton to over $116/ton currently. Though the stock has increased significantly over the last 7 months, the recent surge in Covid positive cases in a number of states in the US could prove to be an impediment for Vale. If the rise in cases warrant a re-imposition of lockdowns, then the stock could see a sharp drop. However, in the absence of another lockdown, Trefis estimates Vale’s valuation at $14 per share. This reflects an upside opportunity of close to 20%.

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