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What Prompted JPMorgan Chase to Upgrade Vale?

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Oct. 18 2016, Updated 11:04 a.m. ET

The word on Wall Street

The market has given a consensus rating of “hold” to Vale (VALE). Of the 30 analysts covering the stock, 13% have given it a “buy” recommendation, 23% have recommended a “sell,” and 64% have given it a “hold” rating.

Vale’s target price is $5.75, which implies a downside potential of 1%. Scotia Capital issued Vale’s highest target price of $9, while its lowest target price of $3.70 came from Sanford C. Bernstein.

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

Upgrades and downgrades

JPMorgan Chase upgraded Vale from “neutral” to “overweight” on September 12, 2016. It also increased the stock’s 12-month target price from $5 to $7. Stronger-than-expected iron ore prices were part of the reason that JPMorgan turned positive. JPMorgan also mentioned that Vale’s business is improving and it expects the company to report positive free cash flow in 2017 and beyond. JPMorgan added that “for a while we have been telling investors that Vale was a strong and interesting story but had a timing issue.”

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. However, they’re still wary about lower prices (COMT) offsetting its volume growth. Vale’s higher capex (capital expenditure) requirements, higher than those of peers BHP Billiton (BHP) and Rio Tinto (RIO) (TRQ), are also holding analysts back, and may be why 64% of analysts have “hold” ratings for the stock. To read more about the recent updates for Vale, please read We Review the Happenings That Are Making Vale SA Look Attractive. In the next part, we’ll see what analysts are projecting in terms of revenue and earnings growth for Vale.

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