Following the excellent third quarter earnings announcement on October 27, analysts following Vale S.A. (VALE) also remain optimistic. An increase in the capital budget for fiscal 2011, justifies management’s view towards the company.
Third Quarter Summary
Vale has reported a stellar performance with an EPADS of $1.13, a huge leap from $0.31 in the year-ago quarter. On a sequential basis, EPADS also increased from $0.70 in the second quarter of fiscal 2010. It beat the Zacks Consensus Estimate of $1.03.
Net earnings also increased to $6,038 million from $1,677 million in the corresponding quarter of 2009 and $3,705 million during the previous quarter. This huge jump was attributable to the increase in the demand for minerals and metals based on the global economic recovery as well as the significant increase in metal prices, which more than doubled compared with the year-ago quarter.
Net operating revenues were $14,102.0 million, almost double of $6,706.0 million in the third quarter of 2009 and $9,658.0 million in the previous quarter.
Reported revenue also surpassed the Zacks Consensus Estimate of $13,375 million. Revenue generated from the sales of ferrous minerals accounted for 76.2% of total revenue, while non-ferrous minerals contributed 18.7%; logistics services 2.8%; coal 1.5% and the rest accounted for 0.8%.
For details click on the link: Vale’s Stellar Performance
Agreement of Estimate Revision
There was an increase in the demand for minerals and metals based on the gradual global economic recovery. The increase in demand for minerals and metals has forced up metal prices to their all-time high. Demand for iron ore is usually related to the worldwide demand for steel, which is expected to climb 5.3% in 2011.
China, the biggest iron ore importer in the world, is expected to increase its steel consumption by 3.5% in 2011. China is also expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.
Following the earnings result, Vale declared a capital investment budget of $24 billion for fiscal 2011, more than double of $10.7 billion invested in the year ended September 30, 2010. The increase in production is also supported by the recent improvement in market demand.
Of the sixteen analysts covering the stock for fiscal 2010, two analysts moved their estimates up, while only one moved in the opposite direction in the last seven days. For fiscal 2011, there was no clear direction as one analyst each moved in either direction. However, the overall view remains positive.
Magnitude of Estimate Revision
For fiscal 2010, the estimate topped by 3 cents to $3.02, while for fiscal 2011 the same remains stagnant at $3.99.
In relation to earnings surprises, Vale has a negative average of 9.57% in all the four preceding quarters, which means that Vale has fallen short by that measure.
Our Take
We expect a significant recovery in the global steel demand and the Chinese consumption in 2011 and beyond, which has encouraged an increase in the capital budget for fiscal 2011. Vale’s numerous strategic acquisitions are also likely to be beneficial in the long-run.
However, a strong exposure to the international markets and intense competition from Rio Tinto (RTP) andBHP Billiton (BHP) puts it at a disadvantage. Thus, we reiterate our Neutral recommendation. The stock also retains its short-term Hold rating (Zacks #3 Rank).
