When a share trades on a price-to-earnings (P/E) ratio of just four, it grabs my attention. That is the case right now with Glencore (LSE: GLEN). The Glencore share price is currently around £4.32. But last year, earnings per share were approximately £1.07. The dividend per share was roughly 35p. That implies a dividend yield of around 8%.
Based on the P/E ratio and dividend yield, the Glencore share price looks like it could be a screaming bargain for my portfolio.
But is it?
Unpredictable industry
As an investor, metrics like valuation ratios and yields can be helpful data points. But it is also important to understand a company’s business. After all, buying a share means owning a stake in a business.
Recent business results for Glencore have been strong. Last year saw revenues grow by over a quarter. The improvement in post-tax profits was even more dramatic — they more than tripled.
Despite this strong performance, the Glencore share price has fallen 14% over the past year.
Why is that? In my opinion, it reflects the cyclical nature of the mining sector. Investors realise that prices can surge but can also fall heavily, affecting profitability in dramatic ways.
Long-term outlook
Still, even allowing for the cyclical nature of the mining industry, could Glencore shares be a bargain for my portfolio?
That will depend on how the company performs over the long term, across the mining cycle.
There are reasons to hope that metal prices will be strong in coming years, for example, thanks to increased demand now that China has fully reopened for international business after the pandemic years.
But there are also potential drivers for lower prices. A weak economic outlook worldwide combined with high energy prices could lead to metal demand falling and prices moving down. I think that would be bad news for the share price.
Potential bargain — or value trap
Even allowing for all that, I reckon the current share price looks quite attractive.
The company is a proven operator, with world-class assets. It has deep experience and client relationships that can help it do well in a competitive market. On top of that, it benefits from economies of scale given its enormous size.
For now though, I will not be acting on the possible bargain offered by the share price.
Why? In short I am not convinced about the medium-term outlook for metal pricing and what that might mean for the company’s valuation. At it current level, the share price may be a bargain. But I do not think it is a screaming one given the risks of weaker metal prices hurting profits in coming years. I am also wary that it could turn out to be a value trap if metal prices fall sharply in coming years.
The shares may look cheap but remain substantially higher than they have been at points over the past five years. For now, I will wait to see what happens in global metal markets. Once metal prices are low, I expect miners’ shares will also head down. I would rather invest in Glencore at that point in the cycle than today.
The post Is the Glencore share price a screaming bargain? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.