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What's in the Offing for VALE (VALE) This Earnings Season?

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VALE S.A (VALE - Free Report) is scheduled to report first-quarter 2019 results on May 9, after the closing bell.

Past-Quarter Performance

In the last reported quarter, Vale delivered earnings per share of 73 cents, registering a whopping improvement of 387% year over year. Total revenues increased 7% year over year to $9.8 billion in the last reported quarter. While earnings beat the Zacks Consensus Estimate, revenues missed the same.

Further, the company beat the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 29.95%.  Let’s see how things are shaping up prior to this announcement.

VALE S.A. Price and EPS Surprise

On Jan 25, the Corrego do Feijao iron ore mine in Brazil operated by Vale collapsed and killed around 300 people in Brazil's deadliest mining disaster ever. The company has already had $3 billion in assets blocked by the courts to ensure that there is enough money set aside to cover the financial impact. Vale suspended the dividend and stopped all share buybacks. It also eliminated executive bonuses. This is the second major tailings dam disaster for the company. In November 2015, a dam collapse at the Samarco iron ore mine in Brazil killed 19 people. This is likely to impact to the upcoming quarterly results.

Vale anticipates that the Brumadinho dam rupture has impacted its iron ore annualized production by about 92.8 Mt. Of this, loss of 40 Mt resulted owing to its intention to advance the decommissioning process of all upstream dams. The balance 52.8 Mt was due to mines that have been suspended on account of judicial decisions or Vale's technical analysis of the dams. The company is taking legal and technical measures to restart these operations but timing of any restart is uncertain and the risk of extended disruptions remains high. The priority management is to help communities affected by the Brumadinho tailings dam tragedy and ensure that other operations do not pose any further threats to the environment or surrounding communities

Vale has written off the assets of the Córrego do Feijão mine and the assets related to upstream dams in Brazil, resulting in an accounting loss that would impact the company's results in the first quarter of 2019.

Nevertheless, supply tightness due to the Brumadinho dam breach and the consequent capacity closures have led to expectations of shortage of iron ore in the market, which is working in favor of iron ore prices. Cyclone Veronica in Australia also negatively impacted iron ore supply from the country. Supply disruptions from the world’s two largest iron ore exporters, Brazil and Australia, led to fears of a supply crunch, which in turn aided a surge in iron ore prices. Even though Vale’s production has gone down towing to the disaster, it will benefit from higher iron ore prices.

Vale has been steadily lowering debt of late through increased free cash flow generation. At the end of 2018, its net debt stood at $9.65 billion, significant drop from $18.1 billion at 2017 end. The company’s current net debt level is even lower than the target of $10 billion. Lower interest expense owing to debt repayment will support earnings in the to-be-reported quarter.

The Zacks Consensus Estimate for total sales of $9.6 billion for the to-be-reported quarter indicates an improvement of 11.7% from the year-ago quarter. The Zacks Consensus Estimate for Vale’s earnings for first-quarter 2019 is currently pegged at 53 cents, suggesting growth of 43.2% from the year-ago reported figure.
 
Price Performance

Vale’s shares have dropped 8.9% in the past year compared with the industry’s decline of 6.8%.
 
Earnings Whispers

Our proven model does not conclusively show that Vale is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:
 
Zacks ESP: Vale has an Earnings ESP of -7.11%. This is because both the Most Accurate Estimate is at 49 cents and the Zacks Consensus Estimate stands at 53 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks Rank: Vale currently carries a Zacks Rank #3. The favorable rank, when combined with a negative ESP, makes earnings surprise unlikely this season.
 
Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
 
Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:
 
Schnitzer Steel Industries, Inc. (SCHN - Free Report) has an Earnings ESP of +1.70% and a Zacks Rank #2.   You can see the complete list of today’s Zacks #1 Rank stocks here.

Commercial Metals Company (CMC - Free Report) has an Earnings ESP of +1.40% and a Zacks Rank #3.
 
Celanese Corporation (CE - Free Report) has an Earnings ESP of +0.18% and a Zacks Rank #3.
 
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