How Rio Tinto Measures up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.

Today I am looking at Rio Tinto  (LSE: RIO  ) (NYSE: RIO  ) to see how it measures up.

What are Rio Tinto's earnings expected to do?

 

2013

2014

EPS Growth

11%

8%

P/E Ratio

7.9

7.3

PEG Ratio

0.7

0.9

Source: Digital Look

Diversified mining giant Rio Tinto is expected to rebound from last year's colossal 38% earnings per share (EPS) contraction, with solid earnings growth forecast for both this year and next.

Not only does the company provide a PEG ratio below the value benchmark of one, but its price-to-earnings (P/E) ratio for 2013 and 2014 also illustrates excellent bang for your buck. A value below 10 is considered excellent value for money.

Does Rio Tinto provide decent value against its rivals?

 

FTSE 100

Mining

Prospective P/E Ratio

16.6

17.8

Prospective PEG Ratio

4.6

1

Source: Digital Look

Rio Tinto smashes the FTSE 100 in terms of both PEG and P/E ratio, while it also outstrips its peers in the mining sector on both counts. It is worth noting that the whole mining sector trades bang on the PEG watermark of one, as fears over the pace of the global economic recovery have dented investor confidence over commodity stocks.

At first glance Rio Tinto appears to be a stunning value pick based on near term GARP criteria. If you are confident over the broad outlook for the world economy, and have faith in the company's ongoing restructuring plan, then Rio Tinto could provide plump rewards looking ahead.

A high-risk, high-reward classic
Rio Tinto announced in April that iron ore shipments advanced 7% in January-March, to 57.3 million tonnes, while semi-soft and thermal coal output advanced 28% to 6.1 million tonnes. The firm also announced that its key Pilbara and Mongolia assets have reached significant milestones as well, while its cost reduction strategy also remains on track.

The company has undertaken massive cost-cutting measures and significant divestments in recent times to boost its battered balance sheet, and The Wall Street Journal recently announced it has identified a number of buyers for its majority stake in Iron Ore Company of Canada. It has also been rumored in recent days that the firm is set to float its diamond business on the London Stock Exchange in coming months, a move which would raise hundreds of millions for the mining firm.

With many of Rio Tinto's major commodity markets expected to record massive material surpluses in the coming years, many doubt whether the mining colossus can keep its head above water and deliver sizable earnings growth moving forwards. If management's steps to streamline the company can continue apace, combined with a continued revival in the global economy, Rio Tinto could prove a particularly canny stock selection.

Dig for treasure with the Fool
As I have explained, Rio Tinto -- like all natural resources plays -- comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a hit-or-miss business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

To help you avoid these potential pitfalls, The Motley Fool's "How to Unearth Great Oil and Gas Shares" report gives an expert view on how to make a fortune from what lies under our feet. Click here now to download our report -- it's 100% free and comes with no further obligation.

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