Is It Too Late To Consider Rio Tinto After Its Strong Multi Year Share Price Run?

• If you are wondering whether Rio Tinto Group is still good value after its long run, or if the easy money has already been made, you are not alone. This is exactly what we will unpack here.
• The stock is up 14.6% over the last year and about 50.1% over five years, even though the last month has seen a modest pullback of around 1.3% after a flat 0.3% move this past week.
• Those moves are happening against a backdrop of shifting sentiment around iron ore demand, policy signals from China on infrastructure and housing support, and ongoing debates about the long term outlook for industrial metals. At the same time, investors are weighing Rio Tinto's progress on major growth projects and its strategy in energy transition materials like copper and lithium. Both of these factors can influence how much investors are willing to pay for each pound of metal in the ground.
• On our checks, Rio Tinto scores a solid 5 out of 6 for valuation, which suggests the market may still be underpricing the business even after these gains. Next we will walk through the main valuation approaches behind that score, before finishing with a more nuanced way to think about what the stock may be worth over the long run.

Find out why Rio Tinto Group's 14.6% return over the last year is lagging behind its peers.

Approach 1: Rio Tinto Group Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates what a business is worth today by projecting the cash it can generate in the future and discounting those cash flows back to the present. For Rio Tinto Group, the model used is a 2 Stage Free Cash Flow to Equity approach based on cash flow projections.

Rio Tinto currently generates about $7.1 billion of free cash flow, and analyst forecasts plus extrapolations suggest this could rise to roughly $14.6 billion by 2028, with longer term projections reaching more than $32.6 billion by 2035. These figures reflect a strong growth profile in the first few years that gradually moderates over time, which is typical for a 2 stage model.

When all of these future cash flows are discounted back to today, the DCF model arrives at an estimated intrinsic value of roughly $175.10 per share. Compared with the current market price, this implies the stock is about 69.1% undervalued based on cash flow fundamentals.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Rio Tinto Group is undervalued by 69.1%. Track this in your watchlist or portfolio, or discover 933 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Rio Tinto Group.

Approach 2: Rio Tinto Group Price vs Earnings

For profitable companies like Rio Tinto, the price to earnings ratio is a useful way to gauge what investors are willing to pay for each unit of current profit, making it a natural complement to cash flow based valuation. In general, faster growth and lower perceived risk justify a higher PE, while slower or more volatile earnings, or higher risk, usually warrant a lower multiple.

Rio Tinto currently trades on about 11.30x earnings, which is below the broader Metals and Mining industry average of roughly 16.84x and well under a peer group average near 40.51x. To move beyond simple comparisons, Simply Wall St uses a proprietary Fair Ratio, which estimates what a reasonable PE should be after adjusting for factors like Rio Tinto's earnings growth outlook, its industry, profit margins, market value and specific risk profile.

Because this Fair Ratio of around 24.54x is tailored to Rio Tinto's fundamentals rather than just what other miners trade at, it is a more nuanced benchmark than raw peer or industry averages. With the current PE at 11.30x versus this Fair Ratio, Rio Tinto still screens as undervalued on an earnings multiple basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1440 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Rio Tinto Group Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way to connect your view of Rio Tinto Group's future with a concrete financial forecast and fair value estimate. A Narrative is the story you believe about a company, translated into numbers such as future revenue, earnings and margins, which then flows into a fair value that you can compare with today’s share price to help inform whether you consider it a buy, hold or sell. On Simply Wall St, millions of investors build and share Narratives on the Community page, where you can quickly select a Narrative, see the forecast behind it, and understand how that leads to a specific fair value. These Narratives update dynamically when new information like earnings, project updates or macro news arrives, so your fair value view can evolve as the facts change. For example, one Rio Tinto Narrative might lean into accelerating copper and lithium growth and assign a higher fair value than another Narrative that focuses more on iron ore headwinds and execution risks, yet both are valid starting points depending on how optimistic or cautious you are.

Do you think there's more to the story for Rio Tinto Group? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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