Falling knife or screaming buy? Glencore ticks both boxes

Fri Sep 4, 2015 1:55pm EDT
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By Atul Prakash

LONDON (Reuters) - What's Glencore worth? Getting a straight answer to this question depends as much on risk appetite as it does a shrewd analysis of the bombed-out commodities sector.

There are plenty of obvious risks ahead for Glencore shareholders: the miner and commodities trader is exposed to a brutal sell-off in raw materials, an emerging-markets slowdown and a poor credit outlook - courtesy of a Standard & Poor's outlook cut - that may threaten its dividend policy.

However, some bargain hunters see value in the stock, which surged 6.6 percent on Thursday alone after slumping more than 50 percent since early May on concerns about a slowdown in economic growth in China, the world's top metals consumer.

The rally came despite S&P cutting its outlook for Glencore to "negative" from "stable" after slashing its forecasts for metals, saying continued weakness in commodity prices due to a challenging outlook in China may put pressure on Glencore's operations, credit measures and free cash flow.

"The possibility of Glencore cutting its dividend is largely priced in. It has been a disastrous period, but the contrarian in me suggests that it's time to buy bombed-out commodity stocks like Glencore," David Battersby, investment manager at Redmayne-Bentley, said.

"We are invested in Glencore and are actively looking to increase our exposure to the sector."

Thomson Reuters data shows Glencore trades at 7.3 times its 12-month forward earnings, against 12.7 times for the STOXX Europe 600 Basic Resources Index. Its dividend yield is about 9 percent, against an average of 4 percent for its peers.

But some fund managers remain cautious and said Glencore's shares could become relatively expensive again due to its poor earnings outlook. Analysts' forecasts for Glencore's earnings per share (EPS) have been falling, down 20 percent in just one month, which in turn could lift its price-to-earnings ratio.   Continued...

The logo of commodities trader Glencore is pictured in front of the company's headquarters in the Swiss town of Baar November 20, 2012.  REUTERS/Arnd Wiegmann