This article is written exclusively for Investing.com
Rio Tinto (NYSE:) is the second largest metals and mining company in the world (is the largest). The company is headquartered in London and has offices around the world.
The company's products include diamonds, titanium and . While mining and processing these materials is often energy-intensive, the company proactively develops and implements procedures that will reduce carbon emissions. The company reports that it has reduced the intensity of greenhouse gas emissions from its products by 27.8% since 2008. . Recently, China imposed restrictions on steel production, causing iron ore prices to fall by 30% in the past month, the largest single-month drop on record. Iron ore reached a record high in May 2021.
After hitting a 12-month high of $94.65 on May 11, RIO is down 23.5% to its current level. The decline was particularly sharp in August. The stock fell 19% from its close on Aug. 3 from $89.39 to $72.38 on Aug. 20. But even with the recent declines, RIO is up 9.08% for the YTD and 24.97% YoY for the lagging 5-year period. a dividend yield of 9.46% and the stock is currently between the ex-dividend date and the payment date. RIO pays out a dividend twice a year.
Part of the stock's recent decline is because the stock is currently between the ex-dividend date and the payment date. RIO has a TTM P/E of 6.3, which is very low for an individual stock. However, miners tend to have low P/E ratios and RIO's P/E was last at or below current levels at various points in 2019. inflation, tariffs and trade restrictions in China and elsewhere , and national priorities for infrastructure investment. To form an overall position for RIO, I rely on two forms of consensus outlook.
The first is the Wall Street analysts' consensus assessment and the 12-month price target. The second is the market-implied outlook, which is derived from option prices. ) or fall below a certain level (the strike price) (put option) over a certain period of time (from today until the option expires). By analyzing call and put prices on a series of strikes, it is possible to calculate the probabilistic price return outlook for the stock or index that reconciles option prices. This is the market implied outlook and it represents the consensus outlook of buyers and sellers of options. For those unfamiliar with market-implied outlook, I've written an overview post with links to relevant financial literature and examples.
Wall Street Consensus Outlook for RIO
eTrade's calculation of the Wall Street consensus combines the views of 3 ranked analysts who have charted the past 90 days and have issued or updated price targets. This is an unusually small number of analysts for a large but foreign publicly traded companies trading in the US because ADRs typically have little analyst coverage. The consensus is bullish and the 12-month price target is 43% above the current price.
Rio: Wall Street analyst consensus review and 12-month price target
Source: eTrade
Investing.com's version of the Wall Street consensus is a total of 6 analysts' forecasts. The consensus outlook is bullish and the 12-month price target is 41.4% above the current price.
Even considering the small number of analysts covering the stock, the uniformly bullish price targets are remarkable. Trefis.com, an analytics firm that calculates the fair value of stocks using fundamental models and discounted cash flow (DCF), estimates RIO's current fair value at $100.25.
Market-Implied Outlook for RIO
I analyzed put and call options at a range of strike prices, all expiring on January 21, 2022, to get the market implied outlook for the next 5 months (between now and expiration) date to be generated). I chose this expiration to provide an outlook through the end of 2021 and because January options tend to be liquid. vertical axis and efficiency on the horizontal axis. of eTrade
The market implied outlook for the next five months is highly symmetrical, with similar opportunities for positive and negative returns of the same magnitude. The maximum probability corresponds to a price return of +1.9%. The annualized volatility derived from this breakdown is 33%, which is moderate for an individual stock.
I was quite surprised that the forward estimate of volatility was not higher given the large recent decline in the RIO. RIO's volatility over the past month has been scaled to 46% YoY (calculated based on daily closing prices). The last 6-month annualized volatility is 35%. Option prices suggest that the higher volatility of the past month is an anomaly. This is a positive sign, as declining volatility indicates that market confidence in RIO is strengthening. outlook for which the negative yield side of the distribution is rotated around the vertical axis (see below).
The negative flip side of the distribution is rotated about the vertical axis (Source: author's calculations using option quotes from eTrade)
The options market assesses nearly identical chances of positive and negative returns (the red dotted line and the solid blue line are almost on top of each other). In theory, a neutral outlook of the options market would correspond to a slightly increased probability of negative versus positive returns, because risk-averse investors tend to pay more than fair value for put options that offer loss protection. symmetric market implied outlook, as we see here, is therefore a somewhat bullish indicator of the options market. The slightly higher probability of negative return versus positive for smaller magnitude changes (from 0% to 12% in the chart above) is small enough that I don't see it as making sense.
Summary
The evaluation of RIO, a huge miner and producer of metals, depends on the outlook for metal prices, global trade and the economic recovery from COVID. Analyst coverage, while limited, is bullish and the expected price increase for the stock over the next 12 months is about 40%. of the options market is 33%, not very high for an individual stock. The P/E is low compared to historical levels and the dividend yield is above 9%. Income investors should note, however, that dividends from ADRs tend to be less persistent and predictable, as many foreign companies are less committed to steady dividend growth than U.S. companies and, of course, dividends paid by ADRs. , are affected by exchange rate fluctuations.
Assuming that the expected price increase for RIO is half what analysts are predicting, a 20% expected return for a stock with an annualized volatility outlook of 33% is still attractive. And, of course, there's also the substantial dividend income. While RIO has downward momentum, both equity analysts and the options market are positive for Rio Tinto. My overall rating for RIO is bullish.
