Glencore’s (LSE: GLEN) share price is down 26% from its 20 May 12-month traded high of £5.05.
Much of this is due to sluggishness in several of its key commodities markets. And this is the result of uncertainty over the economic prospects of China – the world’s largest commodities buyer.
However, China achieved its 5%+ economic growth target last year and has the same in place this year. And in September it announced the biggest economic stimulus measures since the end of the pandemic.
Crucial to me here is what such growth means for its demand for commodities.
More specifically, even if China’s economy grows ‘just’ 4.5% annually it will add an economy the size of India’s to its own every four years.
In short then, I think the market’s pessimism here is overdone. And it might provide an opportunity to consider a quality stock at a bargain-basement price.
Are the shares undervalued?
The first thing to ascertain is whether the stock is indeed undervalued on technical measures I use.
On the key price-to-earnings ratio (P/E) of stock valuation, Glencore trades at 15.3. This is cheap compared to the average 17.5 P/E of its competitors.
The same is true of its 1.5 price-to-book ratio (P/B) compared to its competitors’ average of 2.3. And on the price-to-sales ratio, it also looks comparatively cheap at 0.3 against its peers’ 2.3 average.
To work out what this means in cash terms for the share price, I ran a discounted cash flow analysis. This shows Glencore’s share price is 21% undervalued at the current £4.
Therefore, the fair value for them is £5.06, although they might go lower or higher than that, given the vagaries of the market.
What’s the growth outlook?
In its 30 October Q3 2024 Production Report, Glencore reiterated its previous full-year 2024 guidance for its Marketing division’s earnings before interest and taxes. This is $3bn-$3.5bn (£2.3bn-£2.7bn), compared to its long-term guidance range of $2.2bn-$3.2bn.
Its Marketing division is responsible for selling, buying, and transporting commodities. Its Industrial division’s focus is mining, extracting and processing commodities.
The Report also showed a 113% year-on-year increase in Glencore’s steelmaking coal volumes. It resulted from the finalisation on 11 July of its landmark purchase of Elk Valley Resources (EVR). This is aimed at strongly increasing its production of the steel required for renewable energy infrastructure. China remains the world’s largest steel maker and a dominant electric vehicle maker globally.
A key risk for the firm is that China’s economic recovery stalls, keeping commodities prices low.
That said, analysts forecast that Glencore’s earnings will grow a stunning 43.2% a year to the end of 2027.
Will I buy the stock?
I already own shares in a commodities stock (Rio Tinto), so having another would unbalance my portfolio.
But if I did not have this, I would buy Glencore. Its stellar earnings growth should drive its share price and dividend much higher over time, in my view.
