Thanks to its plunge in late January, shares of Vale (NYSE:VALE) are up less than 1% in 2019. That certainly doesn’t make it a big outperformer, particularly when the overall markets are up so much.
The VanEck Vectors Steel ETF (NYSEArca:SLX), which counts VALE stock as its second-largest holding at 11.7% of its portfolio, is up 15.7% year to date.
Should investors put their faith in VALE stock or are they best off in a different name?
Let’s look at Vale stock to determine if this is one that should be in our portfolio.
Vale Balance Sheet and Cash Flow
The first thing I look at is the balance sheet. For Vale stock, it’s clear that management is committed to deleveraging the balance sheet and paying down debt. With its $68.6 billion market cap, Vale has $16.03 billion in debt. That’s down almost 30% from $22.4 billion in the prior year. Two years ago, the figure stood at $29.2 billion, with 2018’s year-end balance down almost 50% from that figure.
At the same time, the metals miner’s cash flow remains strong. Over the past year, Vale has generated almost $13 billion in operating cash flow and more than $9 billion in free cash flow. The steel industry can have a hefty capex budget, so to see its free cash flow (which includes capex) so strong is encouraging.
Valuing Vale Stock
Current estimates call for Vale to earn $1.86 per share this year. On May 9, we’ll get Vale’s first-quarter earnings results, and we’ll see whether the company is on track for this figure. Worth pointing out is that Vale stock has beat on earnings estimates for at least 13 straight quarters. Given that estimates for the first quarter have fallen to just 36 cents per share from 57 cents per share 30 days ago likely means the stock clears the bar.
Why the hit? A Brazilian dam break from January has become quite the issue. Management didn’t give investors a ton of details on the situation on the last conference call, but investors will expect some updates this quarter. The assumption is that — despite estimates calling for 10.7% revenue growth to $9.53 billion this quarter — this disaster is going cost Vale a pretty penny.
It knocked about 20% of production offline, while authorities froze about $4 billion in assets to cover the potential costs.
Although Vale stock is expected to grow full-year revenue 3.6% this year and earnings by more than 40%, this is an overhang that may keep Vale stock volatile.
Trading Vale Stock
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Vale stock has been a volatile one. As we mentioned, the Brumadinho dam break back in January dealt a serious blow to the stock price. Shares gapped down to uptrend support, then flushed below it in the ensuing sessions.
The big issue, technically speaking, came a few days later. Vale stock rallied back to trendline support and failed on its retest. It then went on to take out its lows (which were actually 52-week lows). Unfortunately, that kind of price action is necessary to create a bottom. That doesn’t mean VALE can’t go lower or that this type of rebound happens every time. But we’ve seen similar price action in names like Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA) this year, too.
Now, though, Vale stock has put in a series of higher lows and has reclaimed that prior trendline. With its recent bounce off this mark, Vale could gain some momentum to clear its major moving averages. If it can, a run to $14.50 is possible before it hits downtrend resistance.
On the downside, below uptrend support and Vale stock will likely test its 50-day moving average. If that doesn’t hold, Vale could take out its March lows, negating the higher lows trend and forcing investors to wait for shares to reset before going long again. Trendline support will then be on watch for possible resistance.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long NVDA and AAPL.
