Vale Stock Rises Almost 3x; What’s Changed?
After rising almost 3x from its March lows of 2020, at the current price of $19 per share, Vale stock (NYSE: VALE) looks fairly valued at the moment. The stock rallied from less than $7 to $19 off its recent bottom compared to the S&P 500 which increased 70% from its recent lows. The stock has outperformed the broader market with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat, which led to a sharp rise in iron ore and pellet prices. As the global economy opens up and supply constraints ease, iron ore shipments are likely to rise in the coming quarters. Recent announcement by Vale that they will resume iron ore pellet production at Samarco mine (which was suspended after the dam rupture in 2015) will provide further fillip to shipment growth. Coupled with elevated prices, this is likely to lead to higher revenue and earnings, the expectations of which has led to an impressive rally in Vale’s stock over recent months. The company’s stock price is likely to hover around its current level in the near term and our dashboard What Factors Drove 55% 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.
The P/S multiple remained almost flat at close to 2x between 2017-2019 but dropped in the beginning of 2020 due to the impact of the pandemic which led to a drop in the iron ore prices. However, the P/S multiple recovered over the last few months after stimulus measures were announced and currently stands at about 2.6x, higher than the levels seen in the last three years. We believe the multiple will drop close to 2x in the near term but still remain above the levels seen over recent years. Higher revenue will offset the drop in the multiple, thus keeping the stock price stable.
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, led to a drop in global iron ore prices in early 2020. 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 spike in iron ore prices thereafter helped the company’s revenues to rise over 5% in Q3 2020.
Iron ore prices have rebounded sharply from $80/ton in April 2020 to almost $170/ton in January 2021, with lifting of lockdowns and expectations of revival in demand. Further movement in commodity prices 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 from 2021 onward. Additionally, Vale’s announcement of resuming pellet production at Samarco will also drive volume growth.
Though the stock has increased significantly over the last few months, the recent surge in Covid positive cases and new strain of virus could prove to be an impediment for Vale. If the rise in cases warrant a re-imposition of lockdowns, then the stock could see some weakness. However, in the absence of another lockdown, Trefis estimates Vale’s valuation at $19 per share. This suggests that the recent rally in the stock is justified (considering the outlook of healthy growth in revenue and earnings) and the stock is fairly valued at the moment.
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