by Tim Gaumer.
Okay, to be fair, while we enjoy an occasional pun, Rio Tinto is not in a hole – it remains nicely profitable, with positive free cash flows, high dividend yield, and a strong balance sheet. However, against a backdrop of weakening demand and lower commodity prices, analysts have been cutting their estimates on the company. The StarMine Analyst Revisions Model (ARM) from Refinitiv provides a rapid signal to users of significant changes in analyst sentiment, as represented by estimate revisions and/or recommendation changes.
Australian-listed mining company, Rio Tinto (RIO.AX) is highly exposed to iron ore prices. As you can see in Exhibit 1, year-ahead futures prices have been falling.
Exhibit 1: Iron Ore Futures (2Yr rebase)
Analysts have responded by cutting their financial forecasts. This is reflected in its ARM score.
ARM is a stock-ranking model designed to predict the direction of future analyst revisions. This is valuable to investors since revisions tend to have a positive correlation with the direction of future price changes.
Exhibit 2 shows the ARM score for Rio Tinto on September 29th. Its score of 7 is a regional-relative percentile rank. So, its listing is ranked in the 7th percentile (bottom decile) relative to all other companies in the Developed Asia Pacific region. Like all StarMine quantitative model scores, stocks are ranked between 1 (worst) and 100 (best). High scores are a more bullish signal.
Exhibit 2: Rio Tinto’s ARM score, September 29, 2022
Unlike a basic revisions model, ARM looks across the Income Statement at changes not only in EPS estimates, but also EBITDA and Revenue. It does this over multiple timeframes and for estimates over multiple fiscal periods: typically for the current quarter, full-year, and next-year. For companies that don’t report quarterly results, this fiscal year and next year’s estimates are displayed. It also looks at changes in analyst recommendations. These details can be seen in Exhibit 3.
All StarMine model detail pages are accompanied by a history chart that shows both changes in the stock price and in the model scores. You can see in Exhibit 3 that Rio Tinto hasn’t always had a bottom decile ARM score, in fact, it was in the top decile as recently as June 2022. However, it has subsequently experienced a negative and persistent series of analyst revisions. Its stock price has similarly slumped.
Exhibit 3: Rio Tinto’s ARM 3-Year History Chart
Looking at the model components view in Exhibit 4, we see major downgrades in estimates across the income statement for both the full year and next year. The StarMine SmartEstimate® is lower still, resulting in large Predicted Surprise percentages. Each of the ARM input components gets its own percentile rank scores and these large estimate cuts places both EPS and EBITDA measures into the bottom decile relative to all other companies in Rio Tinto’s region. Its revenue component score is in the bottom quintile.
Negative model inputs are highlighted in red, neutral in grey, and positive inputs, were there any, in green.
ARM incorporates the StarMine Predicted Surprise analytic as a reinforcing signal. The Predicted Surprise is the percentage difference between the StarMine SmartEstimate and consensus (the I/B/E/S Mean estimate). Whereas the consensus estimate places equal weight on every analyst estimate, the SmartEstimate reweights the average to place more weight on the more recent estimates and the more accurate analysts (see Exhibit 5).
In the time-series charts above, the SmartEstimate is shown as the gold line versus the Mean estimate in blue.
The Predicted Surprise% (PS%) is predictive of the direction of future changes in the consensus, as lagging analysts catch up to those more responsive analysts. Further, a PS% greater than 2% or less than -2% is deemed ‘significant’ as our research shows that it will accurately predict the direction of a subsequent earnings surprise 70% of the time.
Exhibit 4: ARM detailed components view for Rio Tinto
Exhibit 5 is from the Workspace Detailed Estimates view. This shows what is driving the negative EPS score for Rio Tinto’s next year (Dec-23) estimates. The Mean (consensus) estimate is 7.91 AUD, while the SmartEstimate is lower, at 7.20 AUD, resulting in a Predicted Surprise of -8.96%.
Within the last 30 days, seven new estimates have been published, with an average reduction of -11.18% below their prior estimates. This has driven the Mean estimate 4.54% lower. The stock price has followed, losing 5.59% over the past month.
Exhibit 5: Rio Tinto’s FY Dec-23 EPS estimates summary
Exhibit 6 is from the same Detailed Estimates page. In this view, you can see the details behind the SmartEstimate. Greater weight is assigned to the most accurate (4- and 5-star) analysts and the most recent estimates. The analyst(s) who have not yet revised with the group that recently did, triggering what we call a ‘Revisions Cluster®,’ is temporarily excluded from the SmartEstimate and labeled X-Cluster. Estimates older than 120 days are marked X-Age and also excluded from the SmartEstimate.
We deem an estimate from a 5-star analyst that is significantly different than consensus to be a ‘Bold Estimate’ and highlight negative Bold Estimates in Red. A positive Bold Estimate would be highlighted in green.
Exhibit 6: FY-2 Detailed Estimates
Exhibit 7 zooms in on these current estimates. Within Workspace, the name of the contributing firm and the name of each of the 18 analysts covering Rio Tinto would be visible to the user. Here, it’s easier to see that one of the most accurate (5-star) analysts has published an EPS estimate of 6.87 AUD. That’s 13.14% lower than consensus. It is somewhat unusual for analysts to stick their neck out, which is why it has been tagged a Bold Estimate. To be labeled a Bold Estimate, the 5-star analyst’s estimate must pass certain age, absolute (in currency terms) and percentage thresholds.
Bold Estimates can be screened for across a larger universe of companies in the Workspace Screener App.
Exhibit 7: Close-Up view of estimate details
A combination of lower customer demand, falling commodity prices, and higher operating costs have disappointed the street and motivated most of the analysts covering Rio Tinto to rethink their outlook for the company’s revenue, EBITDA and EPS. When they published new, mostly lower, estimates, the StarMine ARM model rapidly reflected this.
StarMine ARM is an effective and time-savings predictive stock-ranking tool for helping users quickly discover fundamental changes that have caused the analyst community to significantly change their outlook on a company.
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