Rio Tinto (LSE: RIO) is under pressure, and you may well be tempted to buy its stock — just how long do you have to wait for before pulling the trigger, though?
Elsewhere, Vislink (LSE: VLK) and Imagination Technologies (LSE: IMG) have fallen this week in the wake of poor trading updates. My advice would be to keep an eye on them.
China
Rio Tinto’s fortunes hinge on how quickly China will show the word that all the pieces of its economy are in the right place — exports, domestic consumption and investment. This is important for Rio, whose fundamentals aren’t in great shape (but aren’t too bad, either). Its poor strategy on iron ore production was plainly wrong, and trends are not encouraging, yet these elements are priced in. What lies ahead then?
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“It’s important that China does continue to improve its data quality to reflect the fast-changing structure of its economy,” IMF spokesman Gerry Rice said on Thursday, according to AFP. The slump in commodities and these issues could weigh on Rio’s valuation for some time, so I wouldn’t buy its stock for at least a couple of quarters even though its valuation is not prohibitive.
Fundamentals
Advanced video technology is a promising business, but one that carries risk — and that is reflected in Vislink’s recent performance. Its half-year results for the six months ended 30 June, which were released on Wednesday, showed declining order intake, lower revenues, rising net debt and higher adjusted earnings. Adjusted margins are up, but I think investors are preoccupied about the level of core cash flow that the company is generating at a time when, as the group said, its “restructuring is largely complete“. Operating cash flow was £5m lower in 1H15 vs 1H14 — and very close to zero, before capital expenditures!
Its shares have dropped almost 20% to 43.5p over the last couple of days, and even if it accelerates in the second half of the year, its net earnings will very unlikely come in above £4m, which would imply a forward P/E of about 15x. Its forward valuation, according to my base-case scenario, is around 25x P/E. There are better alternatives in this market at that price, so I’d give it a pass for now based on fundamentals.
Cyclicality
Do you fancy some kind of exposure to the multimedia and communication technology industry? Well, chipmaker Imagination Technologies may be the right investment for you if have a very long-term view — but even then, I’d advise you to include IMG in a properly diversified portfolio.
A couple of profit warnings this year have been difficult to digest: the stock has fallen 10% this week following its interim trading update, which signalled that the semiconductor sector has enjoyed better times in the past. This kind of business is highly cyclical, so before investing in it ask yourself whether you have enough knowledge and resources to be able to withstand a prolonged downturn. Finally, forward multiples based on 2017 earnings are way too high for value hunters, while cash flow metrics indicate to me that my savings should be invested elsewhere.
