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Engineers set off explosions at the Yanacocha gold mine in Cajamarca, Peru.
Dado Galdieri/Bloomberg
It took a while, but gold digger
Newmont
‘s
stock, a from Baron pick, has finally started doing what we thought it would – and it’s not too late to buy.
In September, we argued that the price of gold could recover and that Newmont (ticker: NEM) was cheap, both factors that would ultimately help drive the stock higher. Equities didn’t do much at first, dropping 4.5% from when we picked it to the low point in early March. That could be attributed to the price of gold rising slightly, but it didn’t necessarily help as the economy seemed poised to recover and investors began to favor riskier assets.
Recently, however, the Newmont stock has shown some life. It’s up about 9.6% since that low in March, while the
S&P 500
has been about flat. Credit gold prices, which received a boost from investors seeking refuge 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 curb economic growth and force the Federal Reserve to halt rate hikes – perhaps as early as next week’s meeting. Gold gained 4.7% in March through Thursday’s close.
Yes, things like production matter — the company said on its fourth-quarter earnings call that the top end of its expectation range would put this year’s production slightly above last year — but if Newmont can sell the same amount of gold for a higher price, it will boost overall sales. Analysts already expect revenue to reach $12.36 billion this year, up 3.7% from last year.
“What is more important is the price of gold and that is really what will be my driving force [sales] expectation,” said Mike Dudas, an analyst with the Vertical Research Group.
That sales growth also comes without additional work, which means Newmont’s margins should be higher as well. Again, gold price isn’t the only thing that affects earnings. In February, the company reported fourth-quarter revenue of $3.2 billion, above estimates of $3.09 billion, but gross margin missed guidance as cost of sales reached $1.78 billion, above expectations for $1. 5 billion. The higher expenses were caused by, among other things, wage increases, higher energy costs and contributed to a net loss.
Now, however, it’s possible that gold prices will rise and those cost increases will ease. Analysts expect Ebitda — earnings before interest, taxes and non-cash costs — to rise 11.4% this year to $5.07 billion, according to FactSet.
“As gold prices rise and costs moderate, you should see some margin and cash flow growth for the company, which is what investors will be looking at,” says Dudas.
Despite Newmont’s recent rally, the stock still looks cheap. It trades at 6.7 times enterprise value to EBITDA, below the five-year average of nine times. Dudas has a $60 price target for the stock, up 31% from Thursday’s closing price of $45.78, but even FactSet’s $55.87 average price target points to a 22% gain.
It is not necessary to stand knee-deep in a stream. Newmont seems like an easier way to find gold.
Write to Jacob Sonenshine at [email protected]
