VALE should be valued between $18 and $25 dollars. Standard & Poors seem to hit it right on the head with a price target of $22. The company has a strong competitive advantage versus peers, however lacks diversification compared to the industry leader, BHP.
The market has priced in multiple risks associated with VALE: Taxation: Corporate taxes are 34%, with double taxation on outside factors. Emerging Market: VALE is located in Brazil, and is therefore is a target of bias. Inflation remains around 5-6%. Volatility: EPS and revenues are volatile due to supply/demand of commodities, and overall pricing (i.e. China). However iron ore prices are unlikely to drop below $90 for an extended period of time.
Summary: VALE will continue to remain an industry leader. Their break-even for iron ore is $75 against the $100+ price. I created a position at $12.40 (50k) on Friday and will grow my position provided the broader market experiences enhanced selling or a correction. Short term fears could also drop their market cap closer to $60 billion, which would be a steal. Price target of $18 min, $24 max (time interval is 1-2 years).
Comments
Tech_time
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I reduced my position by 30% a couple weeks ago. And sold another 25% due to the looming situation behind the mine and falling iron ore prices. Chinese demand seems to be slowing, so I think share prices could fall somewhat lower.
Tech_time
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Shaved off about 20% of my 100k position, grabbing a 7.5% gain at $13.38 --- Simply taking a small profit on the quick run-up. Thinking it could move lower from here.
Thanks for the input everyone. I agree all around. While I am entirely opposed to group-think, I believe we are on the right track. The bottom could be $12.50, 10, or even 5...but VALE maintains a high margin of safety (at least 30%) for investors. So unless there is serious risk unaccounted for (related to Brazil or iron ore prices), this could very well be a stock pick that outperforms the market by a wide margin over the next few years.
Good luck to longs! :)
kkchicken
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FCF relative to capex. Many investors are concerned about debt levels growing...yet cash levels will be more robust in the future. Does the market really think that expenditures are continuously going to outpace operating cash? It's extremely short-sighted. Depending on how well earnings do going forward, they could reach $25 or $30 pps in the next few years. It's a joke. Tied to Brazil or not. Just buy, buy, buy.
glasskey90
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I am a strong proponent of following the ebb and flow of the market. I shorted VALE from $23.72 to $16.56 for a little over a year and just recently covered. I like the chart you made...even though I was taking a risk with "fair value" the trend was so obvious to me...flat out pessimism. And despite VALE was always breaking into fresh lows, I knew that my luck would run out eventually, so I claimed my 30% and forgot about it. Since last April, the stock price has stayed in the same channel for OVER A YEAR. That's what many big traders look for on the monthly charts...definitive consolidation. And while 25% is alot of movement that is exactly what occurs at the bottom = extended periods of intense volatility in a sideways channel.
There is only 15% institutional ownership, meaning the big traders control the inflow and outflow of money. But the selling is turning to exhaustion. The short float isn't kept very high because it's traded for a few % (then covered). They are also a large company. This is a clear case of the Elliot Wave Theory that most people don't seem to recognize. It's obvious with commodities and associated securities. From the beginning of 2011 until now. The first wave down was 4x, in 2012 it was 3x, 2013 was 2x, and this year is 1x.
Directional Money Flow hasn't shown a distinct bullish movement yet. But technicals are bottoming and really don't want to move much lower. Buying within the $12.50 and 10 range is a safe idea. Mike also mentioned the high put selling volume, that's the first indication of a reversal on a descending channel like this one.
Now I am finally willing to place my money in favor. Long VALE.
Mike9990
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Hey guys. Thanks for the post. This is a link to make the chart descriptions easier to read: tradingview.com/v/qGQbXQGX/
We also saw quite a bit of put selling at $12. I think we are edging closer to a bottom. A large dividend with plenty of room for capital appreciation makes this an A+ investment in my book. Going to start buying..
Tech_time
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Haha thanks for the pointers. That's usually the nature of markets though...try to force as many sellers as possible when things simply seem like they can only get worse...IBOV is the case here. From current levels to $10 is 20% downside...so I think I will add $50,000 in increments of 5% give or take. It could drop more if Chinese demand falls off a cliff, but saying it won't reach $20 within a few years isn't realistic. This one is about patience...rarely do you have a large gap that can return 20+% annualized.
DayTrader340
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Yep, the reduction in liquidity is creating a relatively large gap in EM indexes. Just looking at the IBOV, from Dec until March (roughly 3 months), it's dropped about 10% (that's practically a correction). I haven't put any allocation into Brazil for many years now but I'm taking a look now. VALE selling is related to fear at this point, not logic (because who likes to see red every quarter?). But it is very difficult to predict where institutional money is going though (aka when the market will wake up). The bottom could be a few months from now or up to two years. I agree taking small positions in the 12s and adding if we head lower is the best option.
P.S. Not sure if you considered this, but it is EXTREMELY unlikely that VALE will head below $10. Not only is it a financial crisis case scenario, but that would issue a price to earnings of 5. That's actually laughable for a "best of breed" multi-billion dollar company.
Going to sell some of my WFC and buy VALE.
Tech_time
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I apologize for those who cannot read the corresponding descriptions in the RED, BLUE, and GREEN sections; sometimes it is legible for readers, otherwise it is not.
The RED states "expensive from a value standpoint...iron ore prices were unrealistic and so were analyst estimates." The BLUE states "fairly valued range. VALE has shown consistent EPS/revenue growth between 6-11x range. Their forward p/e is 6.86..." The GREEN states "oversold/cheap area. EPS has been driven lower based on the volatility of the industry. Trading under $65 billion mrkt cap makes this very attractive."
The discrepancy between iron ore and VALE's valuation is pretty apparent in my opinion. One of the primary causes of the "avoid" mentality for Brazil, and VALE inclusively, is because of current federal reserve monetary policy. Since tapering was enacted, EMs have seen nothing but a downward trend due to reduced LIQUIDITY, which is by default exhibited in the short term. However, this creates an opportunity for purchasing opportunities in the areas most effected. In other words, emerging markets have seen a large amount of risk already priced in. Seeing not just ordinary companies, but strong corporations trade at 4-7x, so downside is inevitably limited provided the global economy sees continued improvement.