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What Caught the Attention of Analysts Evaluating Vale SA?

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Sep. 8 2016, Updated 11:04 a.m. ET

Analyst recommendations

The market has given a consensus rating of “hold” to Vale SA (VALE). Of the 30 analysts covering the stock, 10% have given it a “buy” recommendation, 27% have recommended a “sell,” and 63% have given it a “hold” rating.

Vale’s target price is $5.20, which implies a downside potential of 8%. Scotia Capital issued Vale’s highest target price of $9, while its lowest target price came from Bernstein at $3.70.

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Since the start of the year, the bullish sentiment for Vale has corrected steeply. At the start of 2016, it had “buy” ratings from 22% of the analysts covering the stock. Its target price, however, has increased by 10% since the share price remained firm due to stronger-than-expected commodity prices, especially iron ore.

Upgrades and downgrades

Morgan Stanley upgraded Vale to “equal weight” from “underweight” on August 9, 2016. It also increased Vale’s target price from $4.80 to $6.20. The broker believes that Vale’s potential asset sales will help alleviate its balance sheet concerns.

UBS, on the other hand, downgraded Vale from “neutral” to “sell” on September 2, 2016. The broker cites a weaker iron ore price outlook in 4Q16 as the major reason for the weakness in Vale’s share price. It also reduced Vale’s target price from $5.45 to $4.20.

S&P revised its outlook for Vale from “negative” to “stable.” It increased the price assumptions for commodities (COMT), including the assumptions for iron ore, gold, aluminum, and zinc.

The sentiment that’s driving Vale

Analysts are happy about Vale’s volume growth in the coming years due to its ongoing expansion project. But they’re still wary about lower prices (COMT) offsetting its volume growth. Vale’s higher capex (capital expenditure) requirements compared to peers BHP Billiton (BHP) and Rio Tinto (RIO) (TRQ) are also holding analysts back. This is probably the reason that 63% of analysts have “hold” ratings for the stock.

In the next part, we’ll see what analysts are projecting in terms of revenue and earnings growth for Vale going forward.

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