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Teck Resources’ Valuation: Mouthwatering or a Value Trap?

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Valuation

Previously in this series, we’ve looked at some of Teck Resources’ (TECK) long-term growth projects. But it’s also important to look at a stock’s valuation multiples. In this article, we’ll look at Teck Resources’ valuation multiples. Specifically, we’ll be looking at its EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization], which is the preferred valuation metric for mining companies (KOL).

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Value trap

According to estimates compiled by Thomson Reuters, Teck Resources is currently trading at 3.57x its 2017 expected EBITDA and 4.31x its 2017 expected EBITDA. Looking at other miners, we see that Freeport-McMoRan (FCX) is trading at an EV-to-EBITDA multiple of 6.04x based on its 2017 EBITDA estimates and 5.15x based on its 2018 EBITDA estimates. BHP Billiton (BHP) and Rio Tinto (RIO) are trading at 5.57x and 5.5x their respective 2017 EBITDAs.

Teck Resources’ one-year forward EBITDA in on the lower side, based on the stock’s long-term average. The valuation multiples might look mouthwatering. but it’s important to note that a low valuation multiple doesn’t necessarily mean an investor should enter a stock. If we look at earnings estimates, we find that Teck Resources is expected to post EBITDA of 5.5 billion Canadian dollars (~$4.3 billion USD) this year and 4.6 billion Canadian dollars (~$3.6 billion USD) next year.

Lower coal prices

The company’s earnings are expected to fall next year. Expectations of lower coal prices could be the key driver behind the expected decline in earnings. Notably, higher coal prices have boosted Teck Resources’ earnings over the last couple of quarters. The company has piggybacked higher coal prices and used its free cash flows to repay some of its debt.

Notably, Teck Resources’ 2Q17 earnings estimates also look aggressive. You can read Teck Resources’ Aggressive 2Q17 Earnings Estimates to see what analysts are projecting for the company’s 2Q17 earnings.

Meanwhile, brokerages are quite bullish on the stock. You can read Analysts’ Views: How Much Upside Does Teck Resources Have? to check on Teck Resources’ ratings and target prices.

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