2014 has been a rather disappointing year for investors in Rio Tinto (LSE: RIO) (NYSE: RIO.US). That’s because shares in the iron ore-focused mining company are down over 5% year-to-date, while the FTSE 100 is up just over 1% during the same time period.
Of course, a great deal of this underperformance is due to continued concerns regarding the Chinese growth story, with the world’s second largest economy missing its forecast GDP growth figure in the first quarter of the year (albeit by only 0.1%). With this in mind, could Rio Tinto still deliver strong growth for investors in future? Is it really a super growth stock?
Growth Potential
With Chinese growth numbers being slightly disappointing of late, growth forecasts for Rio Tinto in 2014 are rather downbeat. For instance, earnings per share (EPS) is expected to fall by 2% this year. However, profitability in the mining sector is highly volatile and the last five years have seen large swings in Rio Tinto’s bottom-line. Therefore, it is of little surprise to see that EPS is expected to bounce back into growth territory in 2015, when Rio Tinto’s bottom-line is set to increase by 14%. This is well above the FTSE 100 average of mid-single digits and highlights just how much growth potential Rio Tinto has.
Why China Still Matters
Due to its focus on iron ore, Rio Tinto has benefited from the vast infrastructure spend that has been a feature of Chinese growth in recent years. Now that the Chinese government is shifting focus towards a consumer-driven economy (rather than a capital expenditure-driven economy), it could be viewed as a major negative for Rio Tinto because it could equate to lower demand for steel and, therefore, iron ore.
However, China is not about to cease spending on buildings, railways and such-like. Certainly, it is unlikely to demand the quantities of iron ore that it has in the past, but its infrastructure development is not yet complete and so demand could remain buoyant for some time. Furthermore, lower demand looks to be priced in to Rio Tinto’s share price, which means there could be positive surprises on this front in future.
Looking Ahead
Partly due to its disappointing share price performance in 2014, Rio Tinto trades on a price to earnings (P/E) ratio of 9.8. This compares very favourably to the FTSE 100, which currently has a P/E of 14.1. Therefore, with earnings set to grow by 14% next year, demand from China having the potential to deliver positive surprises versus market forecasts and a P/E ratio that is relatively low, Rio Tinto should be considered a super growth stock that could perform well throughout the rest of 2014.
