Investing

Why Merrill Lynch Sees Nokia and Rio Tinto Much Better in 2016 International Picks List

Jon C. Ogg

Published: January 5, 2016 7:25 am

Last Updated: January 13, 2020 3:27 pm

It is a new year and Wall Street forecasters have been busy in recent weeks updating their best ideas for the year ahead. One new view has come from Merrill Lynch’s Top 10 EMEA Ideas List, for Europe, Middle East and Africa. It turns out that these changes involve two key players: Nokia Corp. (NYSE: NOK) and Rio Tinto PLC (NYSE: RIO).

Where this report gets interesting is that Rio Tinto was added to the first-quarter Top 10 EMEA Ideas List as an Underperform-rated stock. On the other hand, Nokia was signaled to have over 40% upside, if the firm’s analysts prove to be right.

When Rio Tinto was added to Top 10 EMEA Ideas List for the first quarter, Merrill Lynch said that it is cautious on the outlook for iron ore, Rio Tinto’s key commodity for about 64% of expected 2016 EBITDA. The firm thinks that iron ore can trade below $40.00 per tonne for extended periods. This is due to growing supply, falling costs and soft China demand. Its shares outperformed peers by 9% to 41% in 2015, with a relatively stronger balance sheet, but the team feels that it will de-rate on lower iron ore.

Merrill Lynch said of Rio Tinto:

We think that Rio Tinto is a well-run company and will likely maintain its dividend this year while others cut. … From our discussions with investors, we think that in an “underowned” sector, Rio Tinto is a consensus “relative long.”

Rio Tinto’s earnings are a function of the price of its main commodities: iron ore, copper, aluminum and coal. Pricing tends to mirror broad economic trends. In our view with iron ore in oversupply in the medium term and with average prices set to fall we be believe that Rio shares are likely to underperform.

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