Vale (VALE, Financial) had a sluggish start to fiscal 2015. The company is struggling due to a weak iron industry. Vale is however pleased with the results, as its net loss narrowed as compared to the last year. It clearly states that Vale with good operational excellence is advancing forward to be profitable in such soft market.
The company is also worried about the declining market share. However, in the recent results, Vale displayed its optimism for better future by narrowing the loss. This attracted investors as its shares gained 4.6% in the recent quarters. On the back of it, the company believes that narrower than expected, loss and optimistic business outlook will surely help it to retain investor’s confidence in future. Let us see in detail.
A weak performance and more
Vale’s quarterly revenue dropped by 34.3% to $6.4 billion on a year over year basis lagging the consensus estimates of $7.4 billion. But, this happened mainly due to impact of depreciation of Brazilian currency with respect to U.S. dollar. Also, the decline in the product prices also impacted Vale’s performance majorly. Vale deals in different segment, which are performing well, but, for future, Vale is quite worried about some of them. It is seeing weakness in the iron ore about which we will discuss later.
However, there are some segments that seems promising. For example, Vale is expecting growth in the Brazil fertilizer demand this year. To meet the growing demand, Vale is looking for increasing the production despite soft performance. To balance the losses, Vale is undertaking various cost cutting initiatives as well, which will not only improve its margins but also increase its production volume.
Since the iron ore industry is indicating a downtrend in future, Vale is preparing itself to face this headwind while still holding the profitability. Regarding this, the company has announced that it may cut its iron ore production forecast by up to 30 million tonnes over next two years. The company has to take such bold steps due to continuously falling prices, which would otherwise hurt its margins and the situation can be worse for Vale in future.
Moving on, the company is focusing on bringing back the margins in the midst of severe price slumps. Vale might report loss further, but this initiative might help it to put a competitive edge in the market in long term when the prices recover. As of now, Vale is laser focusing on improving its margins rather than ramping up its volume.
Conclusion
Now moving to the fundamentals, considering the trailing P/E of 144.26 the stock is expensive. As the company is making losses, it is quite difficult to anticipate the earnings in the near term but as the company’s moves are indicating, the stock is expected to perform well in the upcoming quarters. Though Vale’s moves look promising but considering the weak iron ore industry, I would like to suggest the investors to presently see investment in Vale from side lines and wait for the industry to show some concrete signs of gaining market share.
