Now is the time to buy this cyclical mining stock

Our Investment Planning Committee has upgraded Canadian mining stock Teck Resources to a ‘buy’. Its shares are better priced and its earnings are expected to jump as the global economy grows faster. Resume buying Teck for long-term capital gains and small dividends.

mining_stocksOur Investment Planning Committee has upgraded Vancouver-based mining stock Teck Resources (TSX—TECK.B; NYSE—TECK) to a buy. Resume buying it for long-term share price gains and small dividends.

Teck now looks attractively valued. Its share price is down by nearly 45 per cent from its 52-week high. The stock traded at a peak price of $35.67 a share on November 28, 2016.

The share price is down as the profits soar

In 2017, Teck’s earnings are expected to soar to $3.26 a share, from $1.43 a share the year before. Based on this year’s estimate, its price-to-earnings, or P/E, ratio is an appealingly low 6.1 times.

Just remember that P/E ratios are less useful in valuing cyclical stocks such as Teck. That’s because they trade at exceptionally high P/E ratios at cyclical troughs. At such times, earnings are very low, if they exist at all. P/E ratios are abnormally low at peaks in the earnings cycle. Investors refuse to pay higher P/Es because they know that earnings booms are followed by earnings busts.

A stock that trades below its book value

At the start of the second quarter, Teck’s book value stood at $30.51 a share. This means the shares are a bargain, as they trade more than 35 per cent below their book value. Exclude goodwill of $1.110 billion and the company’s book value falls by $1.92 a share, to $28.59. Even so, the stock trades 31 per cent below its adjusted book value. This means that it’s cheap.

Teck’s dividend is currently 20 cents a share. That provides a yield of only one per cent. If you need dividends to maintain your lifestyle, consider other stocks that yield significantly more—and that don’t have that annoying habit of reducing or eliminating dividends from time to time.

Teck’s outlook for 2017 is favourable for another reason. The global economy is accelerating this year. Canada, the U.S. and the European Union are doing better than last year. East Asia continues to do well. This increases demand for the company’s steel-making coal, copper, zinc and lead. This, in turn, raises the commodity prices that producers such as Teck receive as well as the volumes that they can sell.

The consensus recommendation of seven analysts is that Teck is a ‘buy’. We agree with this assessment. Buy Teck Resources for long-term share price gains as well as small dividends.

 

This is an edited version of an article that was originally published for subscribers in the June 30, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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