100-listed resources stocks such as Glencore (LSE: LON:) have seen their share prices experience significant volatility over the last year. Investors have been concerned at times about the prospects for the world economy, with Chinese economic data proving to be mixed. There has also been a threat of rising US interest rates and their potential impact on commodity prices.
Glencore, though, appears to offer a wide margin of safety, as well as the potential to generate improving financial performance. Alongside another resources stock that released results on Tuesday, it could be worth buying right now.
The stock in question is iron ore pellet producer Ferrexpo (LSE: FXPO). Its results showed a rise in total pellet production of 1.6%, while revenue moved 6.4% higher to $1,274m versus the previous year. This reflected higher pellet premiums and freight rates. However, due in part to higher costs, its profit for the year declined by 15% to $335m.
The company plans to reduce debt further over the medium term. Its improving balance sheet means that it is well-placed to deliver the next stage in its planned expansion. It expects to increase investment yet further in order to reach its medium-term production target of 12m tonnes per annum by 2021.
Although Ferrexpo’s share price could experience further volatility, investors appear to have factored in the risks it faces. It trades on a price-to-earnings (P/E) ratio of just 9.5, which suggests that it offers a wide margin of safety. With ambitious production growth targets over the long run and what could prove to be growing demand from across the world economy, the stock could offer value investing potential.
As has been the case with many of its industry peers, the Glencore share price has shown signs of recovery in 2019. However, such was the scale of its decline in 2018, it is still down by 11% over the last year.
As well as concerns surrounding the prospects for the world economy, investors seem to be adopting a cautious stance towards the company’s strategic shift towards cleaner operations. This essentially involves limiting its coal production over the medium term, with it seeking to expand its operations that are focused on cleaner forms of energy. They could prove to be increasingly popular over the long run.
This could entail a challenging transition for Glencore due to its historic reliance on coal. However, with its P/E ratio currently standing at around 9, it seems to offer a sufficiently wide margin of safety to merit investment.
Therefore, while further mixed data from the US and China could hurt its share price performance at a time of significant change for the business, in the long run, its strategy shift may provide it with a tailwind that leads to a rising bottom line and valuation. As such, now could be a good time to buy it.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019
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