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Vale: Despite Drop, Strong Fundamentals Supportive in 2022
Stock Analysis & Ideas

Vale: Despite Drop, Strong Fundamentals Supportive in 2022

Brazil-based Vale SA (VALE) produces and exports iron ore, pellets, manganese, and iron alloys, which are used as raw materials in steelmaking. It operates through the following segments: Ferrous Minerals, Coal, and Base Metals. The company was founded in 1942.

I am bullish on VALE stock. Its one-year losses of approximately 28% make it attractive now, especially as the fundamentals are strong.

Vale Business News

Vale has announced the sale of its stake in California Steel Industries as “its subsidiary Vale Canada Limited (“VCL”) has entered into a binding agreement with Nucor Corporation (“Nucor”) using which VCL will indirectly sell its 50% ownership interest in California Steel Industries (“CSI”).” As a result of this transaction, upon closing, Vale will receive a cash purchase price of US$ 400 million for the 50% of the enterprise value, adjusted for net debt and working capital at closing.

The company has also announced the sale of its coal assets “entering a binding agreement with Vulcan Minerals (“Vulcan”) to sell the Moatize coal mine (“Moatize mine”) and the Nacala Logistics Corridor (“NLC”) for total proceeds of US$ 270 million.” This decision was supported by the company stating it wants to focus on its core businesses and become a leader in low-carbon mining.

On the production estimates, Vale lowered its estimated iron ore production to total 315 to 320 million tonnes in 2021 compared to a previous estimate of 315 to 335 million tonnes.

Q3 2021 Earnings

In Q3 2021 Vale reported a miss on EPS GAAP and revenue. EPS GAAP of $0.76 was a miss by -$0.47 and revenue of $12.68 billion was a miss by -$1.31B. Overall, VALE stock earnings have been improving since Q2 2020.

The company reported a net income of $3.886 billion in 3Q21, which was $3.700 billion lower than 2Q21, primarily due to lower proforma EBITDA and the full impairment of the investment in the Coal business. Net income grew 34% on a year-over-year basis.

The free cash flow was $7.765 billion, $1.238 billion higher than in 2Q21.

About the lower proforma EBITDA, Vale reported that lower byproducts revenues in Base Metals business were due to labor disruptions in Sudbury, while it reported a $1.95 billion Impairment charge on Coal business.

On the positive side, there was an announcement of the new share buyback program up to 4.1% of outstanding shares or up to 200 million shares.

Fundamentals – Risks

I like the VALE stock now for several positive factors. Its Piotroski-F score of 7.00 is very high, indicating good health and good profitability, and its operating margin is expanding. In the last year, revenue has grown by 77.22%, and Earnings Per Share have grown by an impressive 355.84% over the past year.

VALE’s Return On Equity of 52.78% is amongst the best returns of the industry, and the profit margin of 31.65% is amongst the best returns in the industry.

The D/E ratio per latest quarter was 0.49, which is neutral, and the free cash flow growth in 2021 has been solid. In Q1, Q2, and Q3 in 2021 Vale reported a free cash flow of $29.64 billion, $34.87 billion, and $40.8 billion respectively.

The firm mentioned it will pursue low CAPEX growth, which should support future free cash flow growth.

Investors looking for Dividend Stocks should be aware that Vale has a Dividend that is not stable over the past quarters and 76.62% of the earnings are spent on the dividend by VALE, which is not a sustainable payout ratio.

Valuation

VALE stock has a P/E GAAP (FWD) of 3.56, less than the Materials sector’s median figure of 14.79, and a PEG ratio of 0.28, which signals it is undervalued.

Wall Street’s Take

Turning to Wall Street Vale has a Hold consensus based on three Buy, five Hold, and one Sell ratings. The average Vale price target of $15.75 represents 6.4% upside potential.

VALE stock lagged in 2021 but now it has an attractive price, strong fundamentals, and a dividend yield that may not be sustainable, as it is near 20%. The company continues to report very strong free cash flows, and profitability is strong too, both providing strong reasons to be optimistic in 2022.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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