Stock of the Week - Vale (RIO) | Contrarian Finance

Stock of the Week - Vale (RIO)

This week's featured stock is another major Brazilian company. Vale (formerly Companhia Vale do Rio Doce or CVRD) is a diversified metals and mining company. They are well positioned to capitalize on the international growth of emerging markets like China and rising commodity prices.

Vale is a producer and exporter of iron ore and pellets and a producer of nickel. They also produce copper, manganese, ferroalloys, bauxite, precious metals, cobalt, kaolin, potash and other products. As you might have guessed, the company is headquartered in Rio de Janeiro, Brazil.

The company is not only entrenched in China (they have almost 25% of the Chinese iron ore market) but they are also running around buying up commodity assets. I detailed in a previous post why I love companies that not only refine raw materials, but also own the underlying materials, be that oil fields, iron ore or coal mines.

They have fantastic business fundamentals, their gross margin is a whopping 49.93%, and their net margin an equally stunning 35.80%. These are well above industry averages as well. Their debt ratios are at or below industry norms, nothing of note there. Revenues were 32.59B in 2007, with profits of 11.63B.

The dividend yield is a mere 0.6% though, so if you're buying this stock, you're looking for growth. Although their current payout ratio is only 16%, so there's plenty of room to raise the dividend rate in the future, but they seem acquisition focused for the near term.

I think they are fairly priced at the moment, with a current P/E of 16.5 (industry average is 18.1), and a price to cash flow ratio of 13.2 (industry average is 13.1). The ADR is trading at 37.75 as of this writing. Looking forward though, their forward P/E is just 12.3 leaving plenty of room for growth.

Also of important note is that Vale, Rio Tinto, and BHP Billiton together control almost 70% of the world iron ore market. So it won't surprise you when I tell you that Vale raised ore prices a staggering 65% back in February.

For some great analysis on how this affects China, read Kan's post on steel pricing.

Like many Brazilian stocks, Vale is pretty volatile, so I'd wait for a pullback of 5% or more to make an initial entry. The twelve month price targets range from a low of $43 to a high of $57. I personally think $50 is right on the money, as that would put their future P/E right back at that 16.5 level.

Buying the iShares Brazil fund (EWZ) is another way to get exposure to RIO, as some 20% of the holdings of EWZ are actually RIO shares.

Full disclosure: I own shares of RIO.

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