Dopamine and the Weather, Part 2
On Jul 10, we issued an updated research report on Vale S.A. VALE. The company’s performance will be backed by rise in global steel production and strong cash generation. However, its results might be marred by rising cost of sales and unfavorable exchange rates.
Let’s illustrate these factors in detail.
Rise in Steel Production to Boost Top Line
Vale's net operating revenues in first-quarter 2018 benefited from elevated sales prices of the Base Metals segment and sturdier sales volumes of the Ferrous Minerals segment. Further, the company posted record sales volumes for pellets and iron ore during the quarter. Vale believes rise in global steel production will spur demand for iron ore, and in turn, help boost its top-line performance, going forward.
Strong Cash Flow to Drive Growth
Vale has been steadily lowering its debt, of late, through increased free cash flow generation. In the January-March quarter, the company's free cash flow was roughly $5 billion —the highest since first-quarter 2011. Free cash flow improved on the back of the proceeds secured from the spin-off of fertilizer assets, increased operational cash flow generation and Project Finance in Mozambique. Notably, Vale intends to augment its shareholders' value on the back of strong cash generation. In sync with this, the company launched a fresh aggressive and sustainable dividend policy this March.
Rising Cost of Sales Impact Bottom Line
Increasing cost of sales weighed over Vale's bottom-line performance in the last reported quarter. Vale's cost of goods sold rose 10.4% year over year in the quarter, due to input cost inflation, increased pelletizing plants' leasing expenses and higher royalties. In addition, lower volumes hurt profitability in the quarter. These issues might continue to dent the company's bottom-line performances even in the quarters ahead.
Unfavorable Exchange Rates to Mar Results
In the first quarter, 0.4% depreciation of the Brazilian currency with respect to the U.S. dollar thwarted Vale's financial results. Moreover, exchange-rate fluctuations will dampen Vale's revenues and profitability in the quarters ahead.
Share Price Performance
Over the past year, Vale’s shares have performed in line with its industry, as both recorded growth of around 41% during the same time frame.
Zacks Rank & Key Picks
Vale carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the same sector are SMURFIT KAPPA SMFKY, UPM-Kymmene Corp. UPMKY and KMG Chemicals, Inc. KMG. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SMURFIT KAPPA has a long-term earnings growth rate of 5%. The stock has rallied 37% in a year’s time.
FMC Corporation has a long-term earnings growth rate of 10.9%. Its shares have improved 23% over the past year.
Celanese Corporation has a long-term earnings growth rate of 8.9%. The company’s shares have gained 18% during the past year.
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