Shares of Rio Tinto undervalued, Canaccord says

20th Jan 2015 13:16

Shares of Rio Tinto are undervalued given the prospects for commodity prices and the stock's current valuation, analysts at Canaccord Genuity said on the heels of the company's fourth quarter production report.The broker pointed out how the stock was trading at a multiple of enterprise value to operating profits (EV/EBITDA) of 7.2 on the basis of estimates for the company's earnings in 2015, but on a multiple of just 5.2 for 2016.That compared favourably to a historical valuation, since 2001, of seven times the firm's enterprise value over operating profits, especially when most commodity prices were offering upside to the analysts' mid-cycle estimates.The conditions facing the mining outfit are more those which are seen near the bottom of a cycle instead of at the top. So therefore the shares ought to be changing hands at a price closer to the peak of their historic trading band of between four to 10 times EV/EBITDA rather than in the middle of it, analysts Peter Mallin-Jones and Nick Hatchwrote in a research note e-mailed to clients.Making the investment case for the company even more attractive, on the basis of the latest estimates for 2016 Rio Tinto is currently offering a dividend yield of 5.9%. Management is also expected to announce a share buy-back alongside the company's full-year results, which are due out on 12 February, of between $1.5bn to $2bn.Based on the mid-point of that range for share repurchases and the stock's closing share price on 19 January, Rio's total yield for investors would reach 7.4%.Cannacord Genuity maintained its buy recommendation and 3,750p target price on the shares.