Recent Changes to Rio Tinto’s Earnings Estimates
Factors affecting Rio Tinto’s estimates
Rio Tinto (RIO) (TRQ) returned to profitability in 2016 after experiencing a difficult 2015. Its earnings increased 12% year-over-year in 2016. Strong commodity prices, as well as cost-cutting implemented by the company, were the main drivers behind this growth.
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Analysts had been worried about the company’s overexposure to iron ore, which contributes ~70% to its EBITDA.1 After it released its results, analysts increased their estimates significantly.
Analysts are projecting 2017 sales of $40.9 billion for Rio Tinto (RIO), which would reflect a year-over-year gain of 21%. Sales estimates for 2018 and 2019 imply rises of -5.4% and 6.8%, respectively. Its sales estimates have risen 25% in the last six months.
A higher commodity price outlook due to China’s fiscal stimulus and President Trump’s trade outlook has been the major driver behind the revision in estimates.
Rio Tinto’s (RIO) EBITDA projection is $17.9 billion for 2017. Analysts have changed their earnings projections several times during the last year. Estimates bottomed out at $9.1 billion in March 2016 and since then, they’ve been steadily rising.
Rio Tinto’s EBITDA margin was 36.7% in 2016. The impact of a stronger commodity outlook is more pronounced on the margins than on the top line. Costs remained generally constant, and most of the increase filtered down to its earnings. Analysts are expecting margins of 43.7% in 2017 and 43.6% in 2018.
Commodity prices (COMT), especially iron ore prices, could see renewed pressure after new supply comes online and the stimulus situation in China wanes. This development could put pressure on other seaborne iron ore miners such as BHP Billiton (BHP) and Vale (VALE).
- earnings before interest, tax, depreciation, and amortization ↩