Is Rio Tinto A Risky Investment?

With shares of Rio Tinto (NYSE:RIO) trading around $47, is RIO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Rio Tinto is engaged in finding, mining, and processing mineral resources. Its products include iron ore, aluminum, copper, diamonds, coal, uranium, gold, and industrial minerals. Rio Tinto has been trying to divest itself of non-core and unprofitable assets since CEO Sam Walsh took over the company. The firm previously stated it was not interested in selling its Mozambique coal operations, but changed its mind after failing to find a buyer for its diamond businesses. Expect Rio Tinto to grow as it grabs hold of its business again, and continues to provide raw materials around the world.

Rio Tinto has achieved a record output of iron ore for the first half of the year. However, the company continues to get crushed as commodity prices plummet, having reported a $1 billion decline in profits from this time last year, despite that number being close to street estimates. The company is looking to divest itself of its Australian aluminum assets but doesn’t foresee a sale in the current environment, especially after failing to sell its diamond division previously.

T = Technicals on the Stock Chart are Mixed

Rio Tinto stock has struggled over the last several years. The stock is currently seeing a nice bounce from low for the years. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Rio Tinto is trading between its key averages which signal neutral price action in the near-term.

RIO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Rio Tinto options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Rio Tinto Options

31.27%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Year-Over-Year

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four earnings announcement reactions help gauge investor sentiment on Rio Tinto’s stock. What do the last four earnings and revenue growth (Y-O-Y) figures for Rio Tinto look like and more importantly, how did the markets like these numbers?

2012

2011

2010

2009

Earnings Growth (Y-O-Y)

-417.94%

-121.95%

145.73%

182.46%

Revenue Growth (Y-O-Y)

-19.58%

2.51%

33.28%

-7.35%

Earnings Reaction

N/A

N/A

N/A

N/A

Rio Tinto has seen mixed earnings and revenue figures over the last four years.

P = Weak Relative Performance Versus Peers and Sector

How has Rio Tinto stock done relative to its peers, BHP Billiton (NYSE:BHP), Freeport-McMoRan (NYSE:FCX), Vale (NYSE:VALE), and sector?

Rio Tinto

BHP Billiton

Freeport-McMoRan

Vale

Sector

Year-to-Date Return

-18.30%

-16.10%

-15.60%

-29.90%

-13.29%

In a weak sector, Rio Tinto has been a poor relative performer, year-to-date.

Conclusion

Rio Tinto is a global mining firm that provides raw materials to companies and consumers worldwide. The company continues to suffer as commodity prices decline. The stock has not done very well in the last several years but is now seeing a bounce from lows for the year. Over the last four years, earnings and revenue figures have been mixed for the company. Relative to its weak peers and sector, Rio Tinto has been a poor year-to-date performer. WAIT AND SEE what Rio Tinto does this coming quarter.

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