Further "RIO" discussion

First, let's look at the numbers and find RIO's intrinsic value using Rule #1 formula. We know that in order to find out Margin of Safety (MOS) price we need to know three values: Current EPS, Estimated EPS, and Estimated PE in ten years. I've made predictions, one conservative and one aggressive.

Aggressive Prediction:

• Current EPS: 2.33
• Estimated Future EPS: 33 (As seen from historical Equity Growth)
• Future P/E: 13 (As seen from average of historical P/E)

Using these numbers, we conclude that the MOS price (50% off sticker price) is $64.83. When I saw this number I almost jumped out of my chair, it's almost too good to be true. The price is so good that I almost think that my prediction is off. That's why I also came up with numbers for the conservative prediction:

Conservative Predicton:

• Current EPS: 2.33
• Estimated Future EPS: 25.4 (Future earning growth estimate of RIO from money.msn.com on 03/03/08. Personally I don't like this number too much because it's an estimate growth or earning, not equity)
• Future P/E: 12.26
  

The MOS price calculated from these numbers is $33.94. Now I'm interested, look at how close this is from today's price of $35.29 High, $33.93 Low, and $34.84 Closing. If I was to invest in this company on numbers alone, these numbers were enough to persuade me. To be further convinced, let's look at a recent critical fundamental development for VALE.

Following Japan's Nippon Steel and South Korea's Posco (NYSE: PKX), China's top steel producer Baosteel Group has agreed to a 65% increase in iron ore price in 2008 with Vale. Read more here at CNNmoney. From these deals we can expect an increase in earning from the following quarters to come. We must take note that the entire mining sector has been down for the last couple of days, so we probably won't see the 65% reflected until a few quarters later.

Now let's take a look at some charts:

• The market price and simple moving average line are almost about to cross, a sign to get out of the market.
• MACD also shows a bearish sign, even though the indicator is still above the 0 critical level.
• Stochastic brings more attention to a possible bearish market, %K line has crossed under the %D line. Furthermore, it has recently crossed over the 80% point, indicating that the stock is steering away from its overbought status

Verdict: I'm waiting for the buy signals to pop up on all three tools, judging from historical charts, we can roughly expect RIO to dip under to $32.00 or even $31.00.