It took a while but gold diggers
camp, a Barrons pick, has finally started doing what we envisioned — and it’s not too late to buy it.
Back in September, we argued that gold prices could recover and that Newmont (ticker: NEM) was cheap, both factors that would ultimately help lift the stock. Stocks did not do much initially, falling 4.5% since our pick to their early March bottom. That could be blamed on gold prices, which rose slightly, but it didn’t necessarily help as the economy appeared poised to recover and investors began to favor riskier assets.
Recently, however, Newmont stock has shown some life. It’s up about 9.6% since the March low, while the
was about flat. Credit gold prices buoyed by investors seeking havens amid troubles in the banking sector. It doesn’t hurt that the problems at Silicon Valley Bank and
Bank of the First Republic
(FRC) threatened to dampen economic growth and force the Federal Reserve to suspend rate hikes – perhaps as early as next week’s meeting. Gold was up 4.7% in March through Thursday’s close.
Yes, things like production matter — the company said in its fourth-quarter earnings call that the upper end of its guidance range would put this year’s production slightly above last year’s — but if Newmont sells the same amount of gold at a higher price can, it will boost overall sales. Analysts are already expecting revenue to reach $12.36 billion this year, up 3.7% year over year.
“What’s more important is the price of gold and that’s going to really drive me [sales] Expectation,” says Mike Dudas, analyst at Vertical Research Group.
That sales growth also comes without additional work, which means Newmont’s margins should also increase. Again, gold prices aren’t the only thing impacting profits. In February, the company reported fourth-quarter revenue of $3.2 billion, ahead of estimates of $3.09 billion, but gross margin missed guidance as cost of sales came in at $1.78 billion. dollars, which exceeded expectations of $1.5 billion. Higher expenses were driven by wage increases, higher energy costs and other items and contributed to a net loss.
Now, however, it is possible for gold prices to rise and these cost increases to subside. Analysts expect Ebitda — earnings before interest, taxes and non-cash expenses — to rise 11.4% this year to $5.07 billion, according to FactSet.
“As gold prices are rising and costs are moderate, you should see some margin and cash flow growth for the company, and that’s what investors will be watching,” Dudas says.
Despite Newmont’s recent rally, the stock still looks cheap. It trades at 6.7 times enterprise value versus Ebitda, down from its five-year average of nine times. Dudas has a price target of $60 on the stock, up 31% from Thursday’s close of $45.78, but puts itself within FactSet’s average analyst price target of $55.87 a gain of 22%.
You don’t have to be knee deep in a creek. Newmont seems like an easier way to find gold.
write to Jacob Sonenshine at firstname.lastname@example.org
Source : www.barrons.com