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Home Stock Analysis Glencore shares have fallen 11% in a month, but is it time to buy low?

Glencore shares have fallen 11% in a month, but is it time to buy low?

by xyonent
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Image source: Getty Images

Glencore(LSE: GLEN) shares have fallen around 11% from their 12-month high of £5.05 on May 20. There are two main reasons for this decline, but in my view, neither will last.

Changing market trends

The first is the decline in the price of crude oil, the company’s main product, and of course there is a risk that this bearish trend will continue for the time being.

However, this seems unlikely, as the current balance between oil supply and demand is shifting. In early June, the oil cartel OPEC extended production cuts of 3.66 million barrels per day until the end of 2025. A further 2.2 million barrels per day cut will be extended until the end of September 2024.

Combined, these cuts account for about 5.7% of global oil demand. Global supply cuts are generally bullish for oil prices.

This relates to the second reason for Glencore’s share price decline – the outlook for demand from China.

China was a major buyer of many commodities, including oil, from the mid-1990s until the outbreak of the coronavirus pandemic in 2019. But last year, China met its official economic growth target of about 5%, and is aiming for the same this year.

Increased demand from China has also been broadly positive for some commodity prices.

Another risk for Glencore is a slowdown in China’s apparent economic recovery.

Underrated?

Glencore is currently trading at a key price-to-book (P/B) valuation metric of 1.6, a discount to its peer average of 2.0.

The company also looks cheap on the all-important price-to-sales (P/S) multiple: its P/S is just 0.3, well below the average of 2.2 for its peers.

This valuation gap seems even more unjust to me when you consider Glencore’s strong performance outlook for 2023. And this strong performance was achieved in a year when prices for many of the company’s key commodities fell.

Adjusted EBITDA was $17.1 billion, and cash flow from operations was $15.1 billion, both of which could be strong drivers of growth.

Overall, analyst consensus estimates call for the company’s revenue to grow 10% annually through the end of 2026.

Is it time to buy one now?

I am already invested in the commodities sector and investing any more would unbalance my portfolio.

I am also at a stage in my investing life where I am generally happy with the risk/return profile of these investments.

Since I turned 50 a while back, I’ve been focusing on relatively low-risk, high-yield stocks, hoping to be able to live off the dividends while reducing my work load.

But if I were earlier in the investment cycle, I would buy Glencore now for three reasons.

First, we think the stock looks undervalued, second, we think the business has strong growth prospects, and third, we think this could lead to further dividend growth overall.

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