Vale (VALE) Scales 52-Week High: What's Driving the Rally?
Shares of Vale S.A. VALE hit a fresh 52-week high of $15.80 per share on Oct 2. However, the stock closed the trading session tad lower at $15.62. The upside can be attributed to strong second-quarter performance and upbeat iron-ore projections for fiscal 2018.
Over the last year, Vale shares have gained 51%, outperforming the industry’s growth of 45%.
Vale reported second-quarter 2018 earnings of 40 cents per share, which surged around 150% year over year. Net operating revenues increased 19% year over year to $8,616 million in the reported quarter, primarily on the back of higher Base Metal’s sales prices, and increased sales volume of Ferrous Minerals and Base Metals.
Notably, Vale achieved record iron ore production and sales in the second quarter despite the nationwide truck drivers’ strike over rising diesel prices in Brazil. Iron ore production totaled 96.8 million tons (Mt) in the quarter, 4.9 Mt higher than the prior-year quarter. Iron ore and pellets sales totaled 86.5 Mt in second-quarter 2018, 4.8 Mt higher year over year. Vale continues to benefit from record high price premiums for its high grade iron ore fines as high grade ore accounted for 77% of its second-quarter iron ore production compared with 68% in 2017.
The company anticipates producing more than 100 Mt per quarter in the second half of 2018 to meet its full year guidance of approximately 390 Mt. The company is likely to achieve this as volumes continue to improve at S11D mine. Further, Vale’s cash cost is expected to decrease to lower than $13 per ton in second-half 2018, due to the competitiveness of growing S11D volumes, seasonally lower costs and higher production. This upbeat outlook lends a positive insight into its performance, which should support the stock price rise.
Vale has been steadily lowering debt, of late, through increased free cash flow generation. During the second quarter, Vale reduced net debt by $3.4 billion, closing the quarter with net debt of $11.5 billion — the lowest level since the second quarter of 2011. This was made possible by the highest second-quarter free cash flow in 10 years. Over the last 12 months, the company has managed to cut down debt levels by $10 billion. The company is close to its target of $10 billion.
Further, the company announced a share buyback program of $1 billion to be executed within the period of one year. Vale also announced $2.054 billion of shareholder remuneration to be paid in September 2018, the highest since 2014.
Steel demand continues to be strong backed by growing global economy, strong machinery and construction sector activity. Chinese central and city governments continue to stringently implement pollution emissions control, which has led to higher steel prices and steel margins. Steel-makers continue to look for higher iron ore grade and low alumina iron ore to increase productivity while lowering emissions. In this regard, Vale is well positioned as a major supplier of sinter fines combining high iron and low alumina.
Impressive Surprise History & Estimates
Investors' optimism surrounding Vale stock was buoyed by an earnings beat in the second quarter wherein the company maintained its solid surprise trend, surpassing estimates from the last four quarters with an average beat of 37.43%.
Furthermore, analysts are steadily growing bullish on the stock. Over the last 90 days, the Zacks Consensus Estimate for the company moved north by 9% to $1.40 for 2018. For 2019, the Zacks Consensus Estimate for earnings has gone up 9% to $1.70.
Moreover, the Zacks Consensus for earnings for fiscal 2018 reflects year-over-year growth of 3.70% and projects year-over-year growth of 21.4% for the next. These factors are expected to add substantial value to the stock going forward.
We believe that this Zacks Rank #3 (Hold) company with a favorable VGM Score of A has great growth potential. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.
Some better-ranked stocks within the sector include Cleveland-Cliffs Inc. CLF, Quaker Chemical Corporation KWR and Orion Engineered Carbons S.A OEC. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Cleveland-Cliffs has an average earnings surprise of 47.7% for the last four quarters. Its shares have gone up 70% in a year’s time.
Quaker Chemical has an average earnings surprise of 5.2%, for the last four quarters. The stock has gained 35% over the past year.
Orion Engineered Carbons S.A has an average earnings surprise of 6.2%, for the trailing four quarters. The stock has rallied 41% in a year’s time.
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