Vale (VALE) on Track to Lower Debt, Cost Concerns Linger

On Jun 8, we issued an updated research report on premium basic materials company — Vale S.A. VALE. The stock currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B.

Let's dig a little deeper into the fundamental factors of the stock.

Inside Story

Vale perceives that surge in global steel production will spur demand for iron ore, in turn, driving its top-line growth. Moreover, flexibility of the company’s supply chain model will likely continue to strengthen its sales volumes in the quarters ahead.

The company also remains on track to lower debt with increased free cash flow generation. In first-quarter 2018, Vale trimmed its aggregate debt by nearly $3.2 billion to $14.9 billion — the lowest since second-quarter 2011. Moreover, the company plans to reduce its net debt soon, to the targeted level of $10 billion. Free cash flow in the reported quarter came in at roughly $5 billion, the highest since first-quarter 2011.

Vale also intends to augment its shareholders' value on the back of strong cash generation. In sync with this, the company launched a fresh aggressive and sustainable dividend policy this March. In the first three months of 2018, its shareholders' remuneration was approximately $1 billion. The company confirmed that its new dividend program will help boost this remuneration in the quarters ahead.

However, over the past three months, Vale’s shares have rallied 7.4%, underperforming the 13.3% growth recorded by its industry.

In the first quarter, the company’s cost of goods sold flared up 10.4% year over year, due to input cost inflation, increased pelletizing plants' leasing expenses and higher royalties. In addition, lower volumes hurt profitability in the quarter. We fear that these issues might continue to dent the company's bottom-line performances even in the quarters ahead.

Moreover, other industry-specific headwinds such as unfavorable government mining policies, occurrence of an accident in a plant, an oversupply situation in the market or stiff business rivalry remain causes of concern for the company.

Stocks to Consider
 
Some better-ranked stocks in the Zacks Basic Materials sector are listed below:

The Chemours Company CC sports a Zacks Rank #1 (Strong Buy). The company pulled off an average positive earnings surprise of 11.86% over the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Celanese Corporation CE also flaunts a Zacks Rank of 1. The company generated an average positive earnings surprise of 7.02% over the preceding four quarters.

CSW Industrials, Inc. CSWI holds a Zacks Rank #2 (Buy). The company recorded an average positive earnings surprise of 9.80% in the last four quarters.

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