Stock to watch: Rio Tinto in focus for earnings bonanza
This week, we see a growing number of UK companies announce their earnings results. The focus may be on the US tech giants who report earnings at the start of the week, however, we think that there will be trading opportunities in the UK in the coming days as we wait for some major FTSE 100 companies to report Q2 and H1 earnings. Rio Tinto is expected to announce half yearly earnings of a whopping $10.9bn on July 28th, according to analyst estimates.
Details to watch out for in the earnings report
Rio Tinto has been one of the winners from the surge in inflation in recent months, as rising commodity prices are one of the main contributors to the higher inflation readings across the world. Although its share price has struggled since May, this could be reversed as earnings are expected to be double what they were one year ago. The commodity boom has sent the price of iron ore, the main component of steel, to record highs in May, above $230/ tonne. The bumper earnings for Rio Tinto comes even though Rio’s shipments of iron ore fell compared to one year ago, with 76.3 million tonnes being shipped in the three months to the end of June, down from 86.7mn tonnes a year ago.
The slowdown in shipments comes on the back of storms from earlier this year impacting production at its Western Australian facility. This delay has meant that Rio is now advising that it will ship near to the lower end of its range in 2021, of 325mn tonnes – 340 mn tonnes, which means that Rio is likely to pass the crown for biggest iron ore producer to Brazilian company Vale later this year.
Rio expected to deliver some sweeteners for share holders
While investors will no doubt have preferred Rio to have capitalised on the record high price for iron ore and to have exported more, the company is still likely to be swimming in cash. The market is looking for a decent proportion of that cash to be given back to shareholders, with a decent dividend expected along with a share buyback. We expect Rio’s top brass to agree to this, which should give the share price a bounce in the near to medium term.
Although we expect that global economic growth has already peaked, we continue to expect demand for iron ore to remain strong, as the global housing market boom continues to go from strength to strength. For example, US housing starts rose more than expected in June, and even though building permits sunk to an 8-month low, this was mostly down to expensive raw materials and a shortage of labour, which could mean that demand picks up again in the coming months. The housing industry is a major user of steel, and a global surge in demand for new homes and home improvements means that Rio could be a big stock market winner for some time.
The technical outlook for Rio’s share price
From a technical perspective, Rio’s share price also looks well supported. After peaking above 6600 in May, the share price has fallen back to 5895, however, it has found good support above the 38.2% Fibonacci retracement zone from the Nov 2020- May 2021 recovery rally. If the outlook for Rio’s iron ore delivery can be improved, or if the executives sound positive on the outlook for commodity prices for the coming months, then we think that there could be the potential for a break back above 6,000, to 6144, the high from earlier this month.
How Q2 earnings season is going so far
Overall, earnings season so far has been another one for the books, with companies on the S&P 500 beating EPS estimates by a wider margin than average, according to FactSet. At this early point in the earnings season, the S&P 500 is reporting the highest YoY earnings growth since Q4 2009. The good news for stock market bulls, is that analysts now expect double digit earnings growth for the second half of 2021, which could help stock markets continue their rallies for some time to come.
Chart: Rio Tinto and Fibonacci retracement