Down 48% to just over £2.50, Glencore’s share price looks a bargain to me anywhere under £4.17
FTSE 100 global commodities giant Glencore (LSE: GLEN) has seen its share price nearly halve over 12 months.
I think this has largely been the result of market uncertainty about the strength of China’s post-Covid economy. Since the late 1990s, it has been the world’s key buyer of the commodities needed to drive its growth. The recent US imposition of 125% tariffs on the country did not help Glencore’s share price either.
Looking ahead, China’s economic growth outlook remains the key risk for the firm, in my view.
That said, I believe these fears may be overdone. I also think other factors make Glencore’s share price extremely attractive at the current level.
China is bucking market expectations
Q1 this year saw China’s gross domestic product (GDP) grow 5.4%. This was ahead of the highest market forecasts – for 5%, which is also Beijing’s official target for 2025.
That said, even a 4.5% GDP expansion in China would be equivalent to adding an economy the size of India’s to its own every four years.
Positive as well is the recent cutting of US tariffs on China from 145% to 30%. At the same time, China will reciprocate by cutting its tariffs on the US from 125% to 10%.
Although these reductions are initially for 90 days only, they could well be extended I think.
The firm’s business outlook
Earnings growth is the key to rises in any firm’s share price and dividends over time.
Analysts forecast that Glencore’s earnings will increase a stunning 46% a year to end-2027.
Much of this is expected to come from the 11 July 2024 acquisition of steelmaking coal firm Elk Valley Resources (EVR).
The firm highlighted that steelmaking coal is the best way for it to create value for its shareholders. It also believes this revenue can be used to fund opportunities in its transition metals business, including copper.
Based on this earnings growth, analysts project that Glencore will increase its dividends to 8.5p in 2025, 16.2p in 2026, and 25.4p in 2027.
And based on the current £2.63 share price, these would generate respective yields of 3.2%, 6.2%, and 9.7%.
Are the shares a bargain?
The first part of my share price assessment compares Glencore’s key valuations with those of its competitors.
On the price-to-sales ratio, the firm is bottom of its competitor group – at 0.2 against their 2.3 average.
The firms are Anglo American at 1.3, Rio Tinto at 1.9, BHP at 2.4, and Antofagasta at 3.6.
So, Glencore looks a major bargain on this measure.
The same is true of its price-to-book ratio of 1.1 – also bottom of the group, which averages 2.2.
The second part of my assessment establishes where Glencore’s share price should be, based on future cash flow forecasts.
Using other analysts’ numbers and my own, the resulting discounted cash flow analysis shows it is 37% undervalued at its current £2.63.
Therefore, its fair value is £4.17, although shares can go down as well as up.
Will I buy the stock?
I already have shares in other commodity stocks, so adding another would unbalance my portfolio.
However, I believe Glencore’s projected strong earnings growth should push its share price and dividend much higher over time.
Consequently, I think it is well worth the consideration of other investors.
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Simon Watkins has positions in Rio Tinto Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
