Newmont is currently trading at $53.2 per share and has a Graham number of $42.0, which implies that it is 26.7% above its fair value. We calculate the Graham number as follows:
√(22.5 * earnings per share * book value per share) = √(22.5 * 1.22 * 26.758) = 42.0
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 fundamental metrics:
Sales Revenue Should Be No Less Than $500 million
For Newmont, average sales revenue over the last 3 years has been $11,153,000,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
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 by its total current liabilities of $2,654,000,000. 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 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 $3,130,333,333. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend 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 a regular dividend since at least 2011. The company has returned an average dividend yield of 2.2% over the last five years.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
Newmont's earnings per share growth will be calculated using the average EPS of the years 2008, 2009, and 2010, and the average of the years 2019, 2020, and 2021. For the years starting in 2008, we have EPS values of $1.83, $1.13, and $1.61, which give us an average of $1.52. From 2019 to the present, we have EPS values of $0.69, $3.51, and $1.46, which average out to $1.89. The growth rate between the two averages is 24.34%, which falls short of Graham's 30% requirement while remaining positive.
It may be trading somewhat above its fair value, but Newmont satisfies most 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
- growing earnings per share
