Glencore (LSE: GLEN) is a Switzerland-based producer and marketer of natural resources, and its shares look cheap.
With the stock near 486p and set against city analysts’ expectations for 2024, the forward-looking earnings multiple is about 9.7. And the anticipated dividend yield is about 6%.
On top of that, borrowings look like they are under control and other indicators also bolster the case for good value.
But something looks wrong.
And that is, there hasn’t been any director buying since late 2020, according to my data provider.
What do they know?
Now, if Glencore’s prospects were so good and the value so outstanding, why aren’t those deep-pocketed individuals loading up with the shares?
From what I’ve seen, many listed-company directors are no strangers to the concept of satisfying self-interest. And if buying Glencore stock was a compelling investment opportunity now in their eyes, surely, they’d be participating.
But there could be plenty of reasons for the situation. Including the fact that many needn’t bother much with investment. And that’s because they likely receive a personal fortune in remuneration from the company each year anyway. Another is they might already be holding many of the company’s shares.
So why should they take the risk? And, of course, there are risks involved in holding the shares of any business.
But my guess is the investment potential of Glencore just doesn’t look appealing to those among the company directors right now. However, I could be putting too much weight on this anomaly of no director buying.
Weaker earnings
Nevertheless, City analysts expect earnings to decline by more than 50% this year and by a mid-single-digit percentage in 2024.
However, those same analysts predict that shareholder dividends will increase by more than 100% in 2023 before dropping back about 16% in 2024.
Earnings look volatile, but cash flow looks strong, for the time being. So, we have a mixed bag of financial indicators – and not a no-brainer investment opportunity.
And as with any commodity company, there’s a big elephant in the room: the financial outcomes for the business are influenced by exterior commodity prices. If that elephant starts crashing around, it could wreak havoc with the profit & loss account and balance sheet.
So it doesn’t help matters that economists think a period of recession may blight world economies. Any downturn could affect commodity prices.
And that means Glencore’s dividends and earnings may disappear in double-quick time if forward conditions prove to be unfavourable.
Less volatility ahead?
However, there are positives on top of the cheap-looking valuation. For example, the company said in July’s half-year production report that commodity market imbalances and volatility levels have normalised.
That means elevated prices in 2022 have dropped back. And although the situation hit Glencore’s profits in the short term, there’s could be a better and more stable price environment ahead.
Meanwhile, the company has been making progress with mergers and acquisitions. And those corporate moves look set to build value ahead.
In conclusion, there are risks here to consider. Nevertheless, Glencore’s value characteristics tempt me to pile in with deeper research now. And that’s despite an absence of director buying.
