Iron ore producer Vale (VALE, Financial) reported second-quarter results recently. The company impressed with a good improvement in revenue, but couldn’t meet analysts’ estimates on earnings. This weakness was a result of decline in iron ore prices and the weak commodity market in general. The company might lose further market share, as it has posted weak revenue and earnings estimates in future, expecting further downfall in the commodity prices.
However, Vale is trying to offset the losses by selling its assets which might add some revenue to the company. Let us have a look at how Vale aligns itself in this challenging situation.
A look at Vale's turnaround
In the recently reported second quarter, Vale posted earnings of $4.1 billion before interest, tax, depreciation and amortization, which was ahead of analysts' expectation of $3.8 billion. But as EPS is concerned, Vale posted $0.38 per share which couldn’t meet consensus estimates of $0.40 per share. Due to the weak commodity prices, Vale’s net sales also fell about 7.1%.
Vale is suffering due to weakness in the sales. The decline in the commodity prices are shrinking profits. However, despite unimpressive performance, management is claiming to have generated strong cash flows. The company also says that they have maintained cash flow equal to the first quarter. Vale is confident of improving its performance in the near future due to many bright spots.
Vale has many big projects coming up, with which it expects to deliver consistent cash flows in its metal business. It also has traction in its fertilizer business. Vale is least bothered about the weak commodity prices as it managed to save $250 million compared to first half of the year. It is adjusting its operations according to the present situation, and is focusing on various aspects to improve profitability.
Productivity in focus
Vale is laser focused on productivity, and is as planning to continue its important operations. On the other hand, it is also working on various initiatives that are focused on reducing costs to improve its profit margins. With all such efforts and initiatives, Vale is focusing on its objective of sustainable shareholder’s value.
Moving on the fertilizer business, Vale is confident of good progress in this segment, as it is seeing positive traction. Vale is confident about the growth prospects as it is seeing positive impact of the sale price. Moreover, the EBITDA has improved impressively in the past and it is most likely to grow more in the future.
With the ramp of production of phosphate rock in Peru and Brazil, Vale is focusing on record production in the coming quarters which will definitely help the company to improve its earnings. In addition, to strengthen this opportunity, Vale is negotiating partnership opportunities with a view to maximize its strategic option for the business.
On the international front in Malaysia, Vale is focused on improving its inventory levels. It is storing many high silica materials that it intends to blend with carajas soon. This effort is expected to improve the price realisation, as the material will be superior in quality and capture more market share.Ă‚
On the other hand, in order to cushion the weakness that Vale is facing due to falling prices, Vale is opening new facilities including a sprawling Carajas complex in the Brazilian Amazon. This is expected to help Vale stabilize its cash flows.
Another exciting opportunity for Vale is that it expects the demands for steel to increase by 3-5%. This will surely improve the demands for the iron ore. Even the turning U.S economy will lead the automotive sector to grow. Auto sales are expected to increase, which will ramp up the demands for steel and iron ore. Nickel prices are also expected to grow in Europe and the U.S. These are some of the bright spots that make Vale’s long-term prospects strong.
Conclusion
With trailing P/E of 41.93, Vale is highly overvalued. On the other hand, it has strong points such as good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, and expanding profit margins. But as far as earnings growths for the long term are concerned, Vale’s earnings are declining by a CAGR of -16.60% as the commodity prices are expected to further decline. So from the investment perspective the investor should now see investment in Vale from side lines as the prospects for the commodity market are not positive. They should wait for the entire industry to show improving market share.
