Investments: Short-term caution does nothing to dim the long-term case for Rio

Rio Tinto

OUR VIEW: BUY

SHARE PRICE: 3,164P (+132P)

Rio Tinto is among the select group of companies that can reasonably be considered mining bellwethers. Alongside the likes of BHP Billiton, Brazil's Vale and a handful of others, it is a fully fledged commodities behemoth. It is, therefore, useful to pay attention to its comments on the goings-on in the resources world. And the latest noises have been less than bullish.

Speaking on Monday, Rio's chief executive, Tom Albanese, warned that "continuing stresses in the eurozone and a weaker outlook for the US economy are inevitably affecting customer sentiment, which has become more negative in recent months".

So, time to worry? Yes and no, in our view. Yes, the commodities market faces headwinds in the shape of the European debt crisis and the weak US economy. There is also the chance of some slowdown in China's heady rates of growth. But investors should note that these challenges will only add pressure in the short term (and possibly the medium term).

Long term, once the euro crisis has come to its conclusion and the global economy has recovered (and it will, in due course), the fact remains that the world is hungry for resources. And companies like Rio, who not only produce tonnes upon tonnes of prized industrial commodities today but are also investing to prepare for future demand, will reap the fruits of this appetite. There may be some short-term pressure on the share price but, further out, Rio remains well positioned.

Moreover, on the short-term picture, we were encouraged by the company's disclosure that it "continues to sell all it can produce". Customers may be cautious and commodity prices might fall back in coming months. But they will eventually turn north as hundreds of millions of people in places like India and China and elsewhere consume larger amounts of commodities. In the end, then, our rationale remains unchanged. We have been buyers of Rio Tinto because of the long-term trends. They remain intact.

Senior

OUR VIEW: BUY

SHARE PRICE: 164.8P (+2.8P)

Senior announced what we viewed as a pretty good deal yesterday. The industrial manufacturer said it had bought Weston, which produces machine parts and assemblies for the commercial aerospace market.

To put the deal into some context, it is worth remembering that the big aircraft manufacturers notched up some good orders at recent air shows. This bodes well for commercial aerospace building activity, which is what matters in this instance.

Weston is particularly exposed to Airbus, which is another big positive, as the European plane maker has recently booked some eye-catching orders (think of its success in luring customers with its expanded A320 family, for example). We therefore agree with Shore Capital's assessment that, while there may be no cost savings from the deal, the "acquisition is strategic".

Turning to the shares, Senior is trading higher than when we bought in earlier this year. But even then, it is hardly pricey, with the market valuing the stock at around 10 times forward earnings for next year. On enterprise value to earnings before interest, tax, depreciation and amortisation, it is on around 6.3 times, according to Shore. There is no reason to bank profits, as we think there is more to come.

Phoenix IT

OUR VIEW: HOLD

SHARE PRICE: 163P (-25.75P)

Phoenix IT appears to be a fair way from emerging from the flames, especially after yesterday's half-yearly results spooked investors and sent the shares tumbling by nearly 13 per cent last night.

Group revenues at the technology services firm declined from £148.4m in the six months to the end of September 2010, to £132.3m a year later. Pre-tax profits fell from £13.3m to £12.1m, which was in line with expectations among City analysts.

One problem for those watching the stock was the deteriorating debt position, as the net debt figure rose from £65m a year ago to £71.1m on 30 September. The company does expect working capital to improve in the second half, although it guided pre-tax profits lower during the period. But it was not just the debt position, but a disappointing order book, which was 11 per cent lower than a year earlier, that prompted the sharp, bruising sell-off in the Phoenix IT share price.

The Panmure Gordon analyst George O'Connor, while acknowledging that forecast downgrades and a fall in the shares were inevitable in light of the interims, said plans by the new chief executive, David Courtley, to restructure could spark a recovery in the longer term. However, he did acknowledge this was not a stock for "widows and orphans". No indeed, particularly in light of the conditions in the wider market. So, we would not buy, given the risk. That said, the prospect of a turnaround, and the thin valuation following yesterday's fall, means we would not sell either.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before