The Glencore (LSE: GLEN) share price has climbed 50% in the last 12 months. But it’s declined a little over the past month. Is it set for a slide now, or does the dip represent a renewed buying opportunity?
Commodities businesses can be very cyclical, with stock valuations looking especially attractive near the top. But I can’t help thinking the current sector strength could go on for a few more years yet.
It’s all about the valuation of Glencore over the next few years. On current forecasts, we’re looking at a prospective P/E of only a little over four.
That is based on an expected bumper year for earnings though. And analysts expect things to cool off in 2023. Still, even then, the predicted P/E would rise to only a bit above six.
Valuation caution
But metals and minerals prices are volatile over the longer term. And if they drop, earnings should fall. And that P/E valuation might not seem quite so attractive. Sometimes it’s better to buy shares like these during the down cycle, when valuations actually look higher on a short-term fundamental basis.
Looking at the recent Glencore share price decline, I can’t help wondering if the market might be starting to price in a future decline in commodities prices. Forecasts for an earnings fallback in 2023 would tie in with that thought.
But on the other hand, the fall does coincide with the resurgence of the Covid-19 pandemic in China. China’s extreme lockdown policy has damaged much of the country’s short-term manufacturing productivity. And the longer it goes on, the more reduction we should see in raw materials demand.
Uncertainty
So does the Glencore price downturn indicate fears for the long-term direction of commodities prices? Or is it a short-term reaction to the situation in China? I don’t think it’s possible to fully separate the two, as China is a major driver of world prices for all manufacturing inputs.
The big issue, I think, is uncertainty. When a stock like Glencore is on multi-year highs, growing uncertainty can quickly turn sentiment against it.
So what’s my approach to market sentiment in times like these? I simply ignore it. And I go on fundamental valuations.
Glencore dividends
On top of that very attractive P/E forecast, Glencore also offers one of the biggest dividends in the FTSE 100. Forecasts put the 2022 yield at around 10% now, and cover by earnings should be close to two times.
Rio Tinto is on a predicted yield of around the same level, but with significantly lower cover. To me, that suggests the Glencore dividend forecast is more likely to be realistic. And of the two, it’s the one I’d go for.
There are clearly dangers involved in buying Glencore shares now. There’s the general cyclical risk, coupled with the possibility that Chinese weakness could trigger a slide in commodities prices. A downturn would almost certainly hit the dividend as well as the Glencore share price.
But on balance, I see materials demand remaining high for the foreseeable future. Glencore is a candidate for my next share purchase.
