Vale Is a Great Way to Profit From China's Growth

Despite the record cold in China, economic growth is heating up, thanks to the country's stimulus package and strengthening exports.  If the Chinese business climate does improve, Brazilian industrial minerals and metals giant Vale (NYSE: VALE  ) could become even more attractive.

The biggest player in its sector
Even with the difficulties of doing business in Brazil, Vale, the world's largest iron ore entity, is up 14.80% for the last quarter, powered by China's improving economy. As with so many other companies in this sector, Vale needs a booming China; the People's Republic is the world's biggest customer for iron ore and other industrial minerals and metals. The chart below shows how the share price of Vale moves in a trajectory along with that of the exchange-traded fund for China, the iShares FTSE China Index (NYSE: FXI):

FXI Chart

FXI data by YCharts.

The $156 billion stimulus package China recently introduced focuses on infrastructure projects, which bode well for Vale and others in the industrial metal and minerals sector. As the table below shows, industrial metal and mineral companies such as Vale and Rio Tinto, and the shippers who carry assorted commodities, such as DryShips (NASDAQ: DRYS  ) , Eagle Bulk Shipping (NASDAQ: EGLE  ) , and Frontline  (NYSE: FRO  ) , have done well.

Shippers in all sectors need for the Chinese economy to surge as it is the biggest consumer of commodities in the world. More demand from China will lift rates for shippers such as Eagle Bulk, which owns one of the world's largest fleet of dry bulk carriers for hauling iron ore and other goods. DryShips is the second-largest carrier of iron ore, and other bulk goods. Primarily transporting oil, Frontline has benefited from the increasing demand from China and India . Since China is the largest importer of iron ore, oil, and other commodities, its renewed demand for those goods could increase the global demand for shipping:

Metric

Vale

Rio Tinto

DryShips

Eagle

Frontline

Share Price Performance Last Month

8.26%

4.64%

25.44%

22.83%

5.72%

Share Price Performance Last Year

5.26%

8.25%

(1.40%)

(44.61%)

(15.42%)

Source: Finviz.

More iron ore and other transport business from China is needed by shippers.  As the chart below reveals, earnings per share have plunged for Frontline, Eagle Bulk, and DryShips so that it is now negative for each.

FRO EPS Basic Annual Chart

FRO EPS Basic Annual data by YCharts.

What is also troubling is how the earnings before interest and taxes (EBIT)-to-interest expense ratio has fallen for Frontline, Eagle Bulk, and DryShips as shown by the chart below. That indicator reveals how easily the company can pay the interest on its debt; if it's less than 1.0, the company isn't making enough to service its debt. The direction of the EBIT to interest expense for these shippers is troubling. If the ratio remains at these levels, the companies won't be able to service their debt for long.

EGLE EBIT to Interest Expense Chart

EGLE EBIT to Interest Expense data by YCharts.

 Vale is best in its sector in many ways
As the table below shows, Vale's priced attractively compared with the industry average in several critical areas. It is very profitable, with a 29.10% net profit margin for the trailing 12 months, far above the industry average. The strong, above-average gross margin of Vale demonstrates its ability to raise its prices and increase its profits more than its competitors.

Even with such a superior net profit margin, Vale trades at a price-to-earnings ratio below the industry average. It is even more attractive based on that standard, with a forward price-to-earnings ratio of only 8.47. Not only are the earnings undervalued, but so are the assets of Vale, as the price-to-book ratio reveals.

Metric

Vale

Industry Average

Net Profit Margin TTM

29.10%

0.26%

Price-to-Earnings Ratio TTM

7.00

9.00

Gross Margin 5-Year Average

60.50%

45.70%

Price-to-Book Ratio

2.21

2.32

Source: The Motley Fool CAPS.

What a Fool believes
Vale needs for the Chinese economy to continue expanding. There are many reasons to be bullish on the future of China. In addition to economic growth well over 7%, that country has the largest foreign reserves, is the biggest exporter, and has the highest domestic savings rate in the world.

Vale should benefit from all of that, since Chinese economic growth requires iron ore and other commodities. At around $20 a share, Vale trades far below its five-year high of about $45. If Chinese economic growth picks up, so will Vale's stock price.

Vale's twice-yearly dividend should satiate Foolish investors as they wait for demand from China to lift the share price again. In 2012, Vale paid out $1.17 per share in dividends. Stack that against the current share price and you get a 5.8% yield -- a lot better than you'll find in fixed income these days. 


 
 
 
 
 
 
 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 17, 2013, at 5:31 PM, imacg5 wrote:

    """Eagle Bulk, which owns one of the world's largest fleet of dry bulk carriers for hauling iron ore and other goods. DryShips is the second-largest carrier of iron ore, and other bulk goods. """

    Try doing some research.

    EGLE has 45 Supamax ships of 58,000 dwt.

    DRYS has has 40 or so ships depending on what they sold or had delivered this week with only 10 Capes, 21 Panamax, etc...

    Those companies don't come close to COSCO, NYK, Mitsui OSK , MOL.

    Each of which own and control hundreds of dry bulk ships.

  • Report this Comment On March 21, 2013, at 12:47 AM, Takeoverman wrote:

    Seems more logical since Vale follows the FXI, then it would be more prudent to put one's money in the FXI. Any number of things might occur to result in Vale taking a major nosedive, but China's growth is going to continue as sure as interest rates are going to rise in the United States.

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