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Rio Tinto: Cash-Flow Machine, Low Valuation
Stock Analysis & Ideas

Rio Tinto: Cash-Flow Machine, Low Valuation

Rio Tinto (RIO) is a company that produces and distributes raw materials, including diamonds, iron, copper, bauxite, ore, industrial minerals, and uranium. It’s a multinational company with its headquarters in Melbourne, Australia, and global headquarters located in London, UK.

Among mining and metals companies, Rio Tinto is considered the second largest corporation in the world. The number of employees is slightly over 47,000, with its operations running in 35 different countries. The company has worked on a total of 60 projects and has more than 2,000 customers worldwide.

I am bullish on Rio Tinto as its high-quality assets, tremendous track record, stellar balance sheet, prudent investments in long-term growth projects, and attractive valuation make it look like it could be a good time to add shares.

Strengths

Rio Tinto uses the most advanced, industry-leading technology for its extraction process and maintains a strong global presence. The company is one of the leading finders and providers of diamonds, aluminum, and iron ore with a diverse and highly qualified workforce.

Considered a global leader in the metals and mining industry, Rio Tinto also has several opportunities of expanding its business and taking it to other territories. The increasing demand of the market, replacing iron with aluminum, is also something the company can benefit from in the long run.

The safety measures, along with its diverse portfolio backed by multi-decade assets, put this company as a strong competitor among other multinational companies working in a similar capacity.

Recent Results

RIO saw a massive influx of cash from operating activities in 2020 which totaled $15.9 billion – compared to $14.9 billion in 2019. The total shareholder return also reached 110.1%, which was only at 49.6% the previous year. The dividend per share also increased to $5.61, as of the most recent payout.

The underlying earnings reached $12.4 billion with $9.4 billion free cash flow – 9% of change from the previous year. The gross product sales totaled $9.3 billion with the underlying EBITDA margin at the same rate as the previous year – which was 26%. 

Valuation Metrics

RIO stock looks attractively valued at the moment as its forward enterprise value-to-EBITDA ratio is just 3.6x compared to its historical average of 5.23x, and its forward price-to-normalized earnings ratio is just 5.8 compared to its historical average of 9.16x.

Wall Street’s Take

According to Wall Street analysts, RIO earns a Moderate Buy consensus rating based on two Buys and two Holds assigned in the past three months. Additionally, the average Rio Tinto price target of $76.68 puts the upside potential at 7%.

Summary and Conclusion

Rio Tinto is one of the world’s greatest minors as it owns high-quality assets, has a very impressive track record of generating high returns on invested capital, has consistently prioritized shareholders with its very generous dividend program, and is investing prudently and optimizing its productivity and sustainability.

On top of that, the stock was very opportunistically priced right now after the latest pullback and trades at a steep discount to its historical average multiples. Furthermore, Wall Street analysts are generally bullish on the stock, and the average price target implies modest upside for the shares over the next year, especially when combined with the hefty dividend.

As a result, while investors should keep the China exposure risk in mind, it looks like it might be a good time to add shares here.

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