Why One Analyst Sees Value and More Upside for Rio Tinto and BHP Billiton

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The post-election rally has been massive, and the commodities miners and the companies that will supply into infrastructure have seen their shares rally. That may be more muted for companies outside of the United States, but the reality is that many of these international companies already do business and have many employees in the U.S.

Despite recent runs in shares of Rio Tinto plc (NYSE: RIO) and BHP Billiton Ltd. (NYSE: BHP), the analyst team at Argus still sees considerable upside in these two companies. Both companies have also been tied to the post-election rally from commodities and for supplying into infrastructure.

Before getting into the guts of why Argus sees upside, Argus is an independent research firm that is free from investment banking relationships and their research is not directly used to generate brokerage commissions. Their price targets are sometimes significantly higher than other analysts, and their price targets are higher than the consensus estimates from Thomson Reuters here.

BHP Billiton is one of the world’s largest producers of major commodities (iron ore, metallurgical coal, copper and uranium) and it has substantial interests in oil and gas and in thermal coal. Argus noted that BHP Billiton shares have also responded to the U.S. Presidential election and renewed focus on infrastructure spending.

BHP Billiton closed at $37.54 and Argus raised its price target to $46 from $40 in its call. They pointed out that the ADSs are down more than 60% from their all-time highs of 2011. Thomson Reuters has a consensus analyst target price of $36.46 and its 52-week range is $18.46 to $39.12. So shares are close to a 52-week high and the stock is up just 3.3% since the November 8 election date closing price of $36.71.

Rio Tinto was last seen at $38.40, up from a $37.91 close the prior day, and Argus reiterated its Buy rating and raised its target price to $44 from $36 in the call versus the Thomson Reuters consensus target price of $42.18. Rio Tinto ADSs are up 7.5% from the November 8 election day closing price and they have a 52-week range of $21.89 to $40.19. Argus pointed out that the volatile shares remain more than 70% below all-time highs sent in March 2008.

Rio Tinto is a top global mining and metals group in iron ore, aluminum, copper, coal, and diamonds & minerals. After a new CEO announcement earlier this year, Argus feels that Rio Tinto may emphasize its copper operations with slightly less emphasis on its iron ore division.

Argus also showed that Rio Tinto is valued at 11 times 2017 earnings, below the midpoint of the 10-year historical range and attractively valued for a turnaround. The $44 target price implies a multiple of 12.5-times the 2017 earnings per share estimate by Argus due to rising commodity prices helping out its top line. The firm also noted on Rio Tinto’s valuation and on the infrastructure hopes:

The shares have also responded to the outcome of the U.S. Presidential election and renewed focus on infrastructure spending… Looking ahead, we expect the company to benefit from improved economic growth, driven by global stimulus measures, as well as by an upturn in commodity prices. We also look for industry fundamentals to benefit from capacity reductions in the Chinese metals and mining industries.

Also seen in commodities and oil news of late: