Presidents Day Sale: 12 Unbeatable Trades at Sale Prices
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Rio Tinto (RTP)or BHP Billiton Ltd.(BHP)
Making What China Wants
By Nick Atkeson and Andrew Houghton
There are places in this world that do not share our taste for personal debt. They are way under-levered and stimulus dollars placed in these economies go directly into GDP expansion rather than debt reduction. The number one name on this list is China.
The Chinese middle class is now estimated to be between 100 million and 150 million people. The average household income is about $10,000. These families tend to own an apartment and a car, eat out and take vacations, and, most importantly, are familiar with American culture and brands. They want more. But even bigger than the middle class wanting more, are the billion-plus people in China who have yet to join their ranks.
One company is selling the raw materials to the Chinese people to satisfy their rising aspirations.
Rio Tinto (RTP) is a mining company in Australia and the third-largest mining company in the world, producing copper, diamonds, coal, uranium, gold, borax, salt, talc and iron ore.
RTP is trading at about $116 per share -- that's down roughly 80% from its 52-week high of $558. Analyst estimates for the company are about $30 per share for fiscal year 2008 ending in February. The stock is trading for price earnings multiple of less than 4x and has a 5% dividend yield.
To trade for such a low multiple is a strong indicator the company has serious problems like too much debt. What makes their problems appear less problematic is Chinalco (largest aluminum mining company in China) has reached a multi-billion-dollar deal to buy assets from and a larger minority interest in Rio Tinto. The proposed transaction may bring as much as $19.5 billion of fresh cash to RTP and create an even stronger bond with their number one customer, China. On the other hand, there is some risk the Australian authorities will reject the deal as they are nervous about too much foreign ownership of Australian assets and the deal itself carries implications for the going concern value of the company that may be less than bullish.
Buy RTP on sale this President's Day, but recognize that this could be a volatile stock as its debt level is daunting.
For those who would rather just purchase the number one company in this space that is not encumbered by RTP's problems, take a look at BHP Billiton Ltd. (BHP). BHP is the world's largest mining company and is also located in Australia. If you believe the world will continue to consume ever increasing amounts of natural resources, BHP presents a very broad exposure to this opportunity. Although not an 80% off sale price, BHP is down 57% from its 52 week highs which is not bad for a President's Day Sale.
