On Oct 13, 2015, Zacks Investment Research downgraded Rio Tinto plc RIO to a Zacks Rank #3 (Hold) from a Zacks Rank #2 (Buy). Going by the Zacks model, companies holding a Zacks Rank #3 have high chances of performing in line with the broader market in the quarters ahead.
Why on Hold?
Excess supply over demand, economic downturn in China and severe rivalry among mining giants recently triggered a fall in iron ore prices. Weakening market prices of iron ore is adversely affecting Rio Tinto's aggregate revenues and margins. Apart from iron ore, market prices of other products offered by the company such as copper and nickel are also declining over time. Moreover, changes in the global economic activities are exposing the company to demand and supply volatilities.
At the same time, natural disasters like tropical cyclones, severe monsoon and flooding often generate various problems. This apart, higher energy costs and fluctuations in raw material price may adversely impact the company’s margins and earnings in the upcoming quarters. Also, risks of market share loss due to extensive industry rivalry remain a major concern for the company.
Investors, too, are doubtful about the stock’s performance, primarily owing to headwind-related risks. Such uncertainties have led to a downward trend in the Zacks Consensus Estimate for the stock over the last 90 days. The Estimate inched down 0.4% to $2.43 for 2015 and 12.5% to $2.25 for 2016.
Nevertheless, despite the above negatives, the stock carries a Zacks Rank #3, attributable to a few optimistic factors. Increasing global industrialization is enhancing the demand for industrial raw materials over time. Higher economic growth in developed countries such as the U.S. and certain emerging nations like China continues to drive the demand for iron, copper and aluminum in the market. Given this scenario, the company is expected to earn higher revenues, going ahead.
Rio Tinto is also trying to enhance the productivity of its major operational facilities with the help of new solutions provided by big data analytics. Further, the company is streamlining its existing product groups and corporate functions to improve business efficiency as well as lower operational costs. Supported by these strategic initiatives, we believe the company will earn higher margins in the coming quarters.
Stocks to Consider
Better-ranked stocks in the industry include Solitario Exploration & Royalty Corp. XPL, South32 Limited SOUHY and Uranium Resources, Inc. URRE. While both South32 Limited and Uranium Resources, Inc. carry a Zacks Rank #2, Solitario Exploration & Royalty Corp. sports a Zacks Rank #1 (Strong Buy).
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