What’s Driving Estimates for Rio Tinto in 2017 and Beyond?



Factors affecting Rio Tinto’s estimates

Rio Tinto’s (RIO)(TRQ) stock has gained 24% year-to-date. The company’s efforts at cost reduction, its balance sheet improvement, and buoyant commodity prices have significantly improved its prospects. In fact, analysts have now started thinking that the positives are now fairly reflected in the company’s stock price after its recent ascent.

Article continues below advertisement

Revenue projections for Rio Tinto

Analysts are estimating revenues of $40.0 billion for Rio Tinto (RIO) for 2017, which reflects growth of 18.4% YoY (year-over-year). One of the reasons for higher estimates is higher expected prices for commodities in 2017 compared to 2016. Moreover, Rio is also expected to increase volumes for some of its products. These factors combined should lead to higher revenues.

While its growth for 2017 seems impressive, the estimates for 2018 and 2019 aren’t that bullish. The revenue estimates for 2018 and 2019 are $38.4 and $40.5 billion, respectively, implying growth of -3.9% and 5.4%, respectively.

Rio Tinto’s earnings estimates

While the company’s revenue estimates imply growth of 18.4% YoY in 2017, the expected growth in EBITDA (earnings before interest, tax, depreciation, and amortization) is still higher at 49.2% YoY. This estimate for EBITDA implies a margin of 46.2% in 2017 as compared to 36.7% in 2016. Along with higher revenues, the company’s cost reduction in 2017 thus far is the most likely reason for the impressive growth in margins.

Commodity prices (COMT)—especially iron ore prices—have rebounded lately. This is helping Rio Tinto as well as peers such as BHP Billiton (BHP) and Vale (VALE).

In the next part, we’ll take a closer look at Vale’s recent rating changes.


More From Market Realist