Pulling Back The "Vale" of Wall Street

On Tuesday, Vale , the Brazilian metals and mining company got hit with two dueling pieces of analyst research: HSBC downgraded Vale’s stock from neutral to underweight and at the same time Morgan Stanley upgraded it from equal-weight to overweight. Basically, HSBC is going from "hold" to "sell," while Morgan Stanley suggests the stock has moved from "hold" to "buy." These conflicting calls should confuse you, so don't worry, Cramer is breaking it down for you and telling you which call he trusts and which call he thinks is unfounded.

Not only does Cramer hold the company in his charitable trust, but he's got real reasons to disprove HSBC's downgrade of one of his favorite stocks and he thinks this downgrade call is more about how analysts a big brokerage firms operate than it is about Vale's future profitability. HSBC is downgrading Vale on valuation, based upon an expected fall-off in Chinese demand for its iron ore, and the negative effects of a stronger Brazilian Real combined with a weaker dollar.

On the other hand, Morgan Stanley? It upgrades Vale on valuation, better demand in non-Chinese markets like Europe, Brazil and the US, and potentially stronger iron ore pricing. Cramer admits that it may seem crazy that on the same exact day two analysts would come out with diametrically opposing opinions about one stock, but unfortunately that's sometimes how these things work.

But Cramer wants to dive deeper. He points out that HSBC has had a neutral on Vale since the stock was at $12 this March and since then the stock’s up more than 68% without a change in analyst ratings. After missing over $8 of upside, the HSBC analyst downgraded Vale to underweight, but at the same time the price target was increased from $17 to $18.50, and the iron ore price forecast for 2010 went from down 10% to flat. "Even though the analyst thinks the business will do better than he’d thought, the guy still takes the stock down," Cramer argues.

How about the Morgan Stanley upgrade? Cramer thinks this is a great piece of research that sums up why he's bought into the stock for his charitable trust. The analyst for Morgan Stanley says that the market’s too focused on slowing Chinese demand, while investors ignore the fact that Vale’s traditional markets—Brazil, Europe and the U.S.—are recovering more than expected.

Steel output in Europe, Brazil and Asia outside of China has increased for three months in a row, although it's still down 28%, and now steel output is increasing in Europe. To make steel, you need iron ore, which Vale is a supplier of. The analyst at Morgan Stanley expects Vale to get a 10% price increase for its iron ore, says Cramer, who also points out that the stock has underperformed the Brazilian market by 26% and underperformed the average Brazilian steel stock by 46% so far this year.

What is the major difference in the analyst calls? Simply, iron ore prices. Morgan Stanley has a base prediction that they’ll stay flat, but thinks a 10% price increase is possible—and if that happens, Vale, with its high grade ore, low costs, and world dominance, benefits the most and the stock is worth somewhere in the high $20s or the low $30s, says Cramer. The analyst from HSBC? He thinks iron ore prices will be flat, but even with this, Cramer sees the price of the stock landing somewhere in the $20s.

Cramer's Charitable Trust owns Vale.

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