Don't Buy Newmont Before Checking its Graham Number!

Newmont is currently trading at $45.81 per share and has a Graham number of $27.1, which implies that it is 69.0% above its fair value. We calculate the Graham number as follows:

√(22.5 * earnings per share * book value per share) = √(22.5 * 1.22 * 1.7) = 27.1*

The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following:

Sales Revenue Should Be No Less Than $100 million.

For Newmont, average sales revenue over the last few years has been $10,178,000,000.00, so according to the analysis the stock has impressive sales revenue.

Current Assets Should Be at Least Twice Current Liabilities.

We calculate Newmont's current ratio by dividing its total current assets of $7,696,000,000.00 by its total current liabilities of $2,654,000,000.00. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Newmont’s case, current assets outweigh current liabilities by a factor of 2.9.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since Newmont’s debt ratio is 1.1, the company has an average amount of debt. We calculate Newmont’s debt to net current assets ratio by dividing its total long term of debt of $5,565,000,000.00 by its current assets minus total current liabilities.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years.

Newmont had positive retained earnings from 2008 to 2021, during which time they averaged $1,834,233,333.33. Retained earnings are the are the sum of the current and previous reporting periods' net asset amounts, minus all divend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.

Newmont has offered dividends since at least 1995, and has returned an average dividend yield of 2.1% over the last five years.

The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.

We are going to compare Newmont's earnings per share averages from the two 'bookends' of the 13 year period for which we have data. The first bookend comprises the years 2008, 2009, and 2010, whose Eps values of $1.83, $2.66, and $4.55 average out to $3.00. Next we look at the years 2019, 2020, and 2021, whose values of $3.81, $3.51, and $1.46 also average out to $3.00. So there has been no Eps growth pattern over the period.

Even though it is trading far above its fair value, Newmont satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it has:

  • impressive sales revenue
  • an excellent current ratio
  • an average amount of debt
  • positive retained earnings from 2008 to 2021
  • a solid record of dividends
  • decreasing earnings per share
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.