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Why Analysts Expect a Strong Pickup in Rio Tinto’s Margins

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Jan. 17 2018, Updated 7:31 a.m. ET

Factors affecting Rio Tinto’s estimates

Rio Tinto (RIO) (TRQ) stock returned a positive 37.6% in 2017. The company has reignited its efforts to reduce its costs and increase its productivity. These efforts, along with its balance sheet improvement and buoyant commodity prices, have significantly improved RIO’s prospects.

As we noted earlier in this series, some of the positives have now become so obvious that analysts have downgraded Rio, saying that these positives have already been priced in to its stock.

Let’s take a look at the company’s revenue and earnings estimates.

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Revenue projections for Rio Tinto

For 2017, analysts expect Rio Tinto to have seen a solid rise of 18.0% in its revenue year-over-year (or YoY). This growth has mainly been attributable to higher production for some commodities and higher prices for these commodities in 2017 compared to 2016.

The estimates for 2018 and 2019 are not that bullish. Analysts see rises of -4.0% and 6.2% for 2018 and 2019, respectively.

Rio Tinto’s earnings estimates

Analysts’ estimates for EBITDA (earnings before interest, tax, depreciation, and amortization) for 2017 are even more impressive for Rio, implying a YoY rise of 50.0%. This EBITDA estimate implies an earnings margin of 46.5% for the company in fiscal 2017, higher than the 36.7% it achieved in 2016. Along with its higher revenue, RIO’s cost reductions in 2017 were the most likely reason for the impressive growth in margins.

Commodity prices (COMT)—especially iron ore prices—have rebounded lately. This rebound is helping Rio Tinto along with its peers BHP Billiton (BHP) and Vale (VALE).

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

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