A stock reaching a triple-figure share price should not be a momentous event – it merely represents the fact that a transaction was struck at $100 or more. But humans are very influenced by round number milestones, and $100 is a price level that can assume psychological importance for many.
A stock with a $100 share price might seem very expensive to some retail investors: they might think that a $2 stock has a better chance of doubling than a $100 stock. But the $2 stock might be considerably over-valued, and the $100 stock could be under-valued. The opposite also could be true as well, but the share price on its own is no indicator of value.
Here are three members of the triple-figure club on the ASX where I think you can make a case for them being currently under-valued.
1.Rio Tinto (RIO, $119.89)
Market capitalisation: $194.5 billion
12-month total return: 4.21%
3-year total return: 8% a year
FY25 estimated yield: 5.8%, fully franked (grossed-up, 8.3%)
Analysts’ consensus target price: $129.75 (Stock Doctor/Refinitiv, 15 analysts)
Global mining giant Rio Tinto produces iron ore, aluminium, copper, gold, lithium, diamonds, and titanium dioxide. It’s the world’s largest iron ore producer, and the iron ore division accounted for about 80% of the company’s profit in 2023 (Rio Tinto uses the calendar year as its financial year).
As such, Rio Tinto is one of China’s largest iron ore suppliers, and is this heavily tied-into that country’s economic health. The company expects stimulus measures in China to power a slow but steady recovery of the world’s second-biggest economy in 2024, flowing-through to improved commodity prices.
In its 2023 result reported last month, Rio Tinto said that weaker metal prices on their own caused a US$1.5 billion (6%) fall in underlying EBITDA (earnings before interest, tax, depreciation, and amortisation), mainly driven by lower aluminium prices, which offset higher realised pricing in the iron ore business. Copper, diamonds, and industrial minerals prices were also lower. But currency movements lifted the underlying EBITDA by US$600 million.
All up, for 2023, Rio reported a 3% decline in revenue to US$54 billion, and a 9% fall in underlying EBITDA to US$23.9 billion, a result broadly in line with market expectations. But Rio paid a better-than-expected final dividend of US$2.58 a share final dividend, on the way to a full-year payout of US$4.35 a share in fully franked dividends, which was down 11.6% year on year: the dividend converted to 653.67 Australian cents.
In 2023, Rio shipped 331.8 million tonnes of iron ore; this year, the company expects its Pilbara operations to produce between 323 million tonnes–338 million tonnes. In 2023, Rio Tinto’s iron ore production was conducted at a unit cash cost of US$21.50 a tonne, and the company has given a 2024 guidance range of US$21.75–US$23.50 a tonne. Iron ore is projected to come down sharply from current levels around US$118 a tonne, but Rio Tinto’s margins have quite a bit of buffer.
In the medium-term future, Rio Tinto committed in February to invest US$6.2 billion in the Simandou mine, rail, and port project in Guinea, in partnership with at least seven other companies, including five from China. Rio’s partners, including Chinalco (the world’s largest aluminium producer) and Baowu (the world’s biggest steel producer) still need final investment approval from Beijing, but as it stands, Simandou is the world’s biggest mining project.
The company is also investing in its new Rhodes Ridge prospect in Western Australia – one of the largest undeveloped deposits in the world – as well as the Oyu Tolgoi copper mine in Mongolia – and increasing its aluminium output and increasing its involvement in lithium.
Rio Tinto has also joined forces with steelmaker BlueScope and fellow iron ore producer BHP to fast-track the production of “green steel.” While more than 70% of global steel is produced using blast furnaces – which Rio supplies – about 20% through electric arc furnaces and about 5% as direct reduced iron (DRI).
DRI is seen as the most promising pathway to decarbonise iron and steelmaking; in the DRI process, gas and ultimately green hydrogen replace coal. Rio Tinto definitely has an eye to the future and the need to decarbonise its operations as much as possible.
In the meantime, investors buying RIO at these levels can feel reasonably confident of capital gain, albeit in the single-digit range; and there is a very attractive projected yield on offer, to augment the return.
2.CSL (CSL, $285.47)
Market capitalisation: $137.9 billion
12-month total return: –2.7%
3-year total return: 6.1% a year
FY25 estimated yield: 1.6%, 5.2% franked (grossed-up, 1.7%
Analysts’ consensus target price: $305.64 (Stock Doctor/Refinitiv, 16 analysts)
CSL is a true global leader. It is the world’s largest maker of plasma-based therapies (CSL Behring), a global leader in treatments for immunodeficiency and bleeding diseases such as haemophilia, and one of the world’s biggest suppliers of flu vaccines (Seqirus). In 2022, CSL finalised its latest big acquisition, Vifor Pharma, the Swiss renal therapy, and iron deficiency products business that brings CSL into the renal disease and cardiovascular markets.
CSL underpins its position by investing hugely in research and development to create new products, creating a pipeline of products that continually opens up new revenue streams and keeps the company ahead of competitors. The strength of CSL’s business was on show last month, when the company suffered the risk of all biotech companies, when a potential blockbuster drug trial did not deliver the expected results.
The drug candidate, known as CSL112, was aimed at preventing second heart attacks in patients that had already suffered one. It was one of CSL’s top “blockbuster drug” prospects and had sailed through Phase 1 and Phase 2 trials. But the Phase 3 trial did not achieve its goal. It was the largest-ever clinical trial undertaken by the company, taking six years, and costing CSL about $1 billion. Its failure stripped 6% ($7.1 billion) from the share price.
But the company’s global business portfolio means it can afford the occasional trial failure on the drug development side; and the impressive half-year result (to December 2023) brought the share price back to virtually even for the year so far.
The half-year result showed an impressive 11% lift in underlying net earnings, to $US2.017 billion ($3.11 billion). The company’s annualised revenue over the first half jumped 20% in Australian dollar terms (up 11% increase in US dollars): the December 2022 half-year only included five months’ contribution from Vifor.
CSL reiterated its earlier guidance, projecting a full-year net profit (after tax and amortisation of acquired intangibles, or NPATA) ranging between $US2.9 billion–$US3 billion, which implies growth of 13%–17%, based on constant currency. Consensus expectations are for this to come in close to the top of the range, at US$2.994 billion.
The company almost routinely under-promises and over-delivers in terms of earnings. The quality of its franchise, balance sheet strength, outstanding track record of management and confidence in future earnings growth have justified a high P/E multiple through its listed life (CSL currently trades at about 26.8 times expected FY25 earnings, a P/E that is around its long-term average P/E). With long experience of the stock, the market doesn’t really value CSL on its current earnings alone – it looks at the company’s suite of competitive advantages and its prospects for growth.
The company is not a huge dividend payer in terms of yield, but the dividend is growing each year. In the recent-half-year result, the interim dividend was $US1.19 per share, versus $US1.07 in the December 2022 half-year.
CSL is a high-quality biotech company, with clear avenues for growth across global markets. You could confidently buy it at these levels and expect capital appreciation and dividend growth.
3.Block, Inc. (SQ2, $116.58)
Market capitalisation: $72 billion
12-month total return: –6.1%
3-year total return: n/a
FY25 estimated yield: no dividend expected
Analysts’ consensus target price: $138.67 (Stock Doctor/Refinitiv, four analysts)
Block Inc. is a financial technology company that came to the ASX in January 2022, by virtue of a scrip (shares) takeover of Australian buy-now, pay-later (BNPL) company Afterpay.
Block Inc. (formerly known as Square) created two large, independently successful businesses, the Square payments business and Cash App, a consumer fintech that was developed in 2013 at an internal company ‘hackathon’ as a way for consumers to make electronic peer-to-peer payments.
The company is now focused on building-out its envisaged ‘ecosystem,’ in which Block’s merchant businesses (Square and Afterpay) are connected to Cash App consumers directly, through the called Cash App Commerce interface.
The promise – and the opportunity – was demonstrated last month when the company’s fourth-quarter earnings beat analysts’ profit estimates and showed strong growth in its Square and Cash App revenue. It was a surprisingly strong quarter, with net revenue up 24% year-on-year, to US$5.77 billion; gross profit up 22%, to US$2.03 billion, with Square generating a gross profit of US$828 million (up 18%) and Cash App producing gross profit of US$1.18 billion, up 25%. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) doubling, to US$562 million. At 31 December, the company was sitting on US$7.7 billion in available liquidity.
Block reported a quarterly operating loss of US$131 million, a slight improvement from the US$135 million operating loss in the fourth quarter of 2022, while adjusted quarterly operating income of US$185 million was up from a loss of US$32 million. Over the full 2023 calendar year, Block reported gross profit of US$7.5 billion, up 25%.
Despite worries over the outlook for US consumer spending – the volatility around sentiment on this has played havoc with the Block share price – analysts think Block is very well poised for expected growth in BNPL; in the US, BNPL penetration is less than 2% of total payments, compared to the Australian proportion of 13%–15%, implying significant room for growth. And Block has put in place the framework to create its multi-layered financial ecosystem that connects merchants and consumers. The stock looks attractive right now.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
