One of Wall Street's biggest winners of the day is Newmont, a silver company whose shares have climbed 6.1% to a price of $40.51 -- 43.63% below its average analyst target price of $71.86.
The average analyst rating for the stock is hold. NEM may have outstripped the S&P 500 index by 6.0% so far today, but it has lagged behind the index by 26.0% over the last year, returning -10.0%.
Newmont Corporation engages in the production and exploration of gold. The company is included in the basic materials sector, which groups together the steel, coal, precious metals, chemical, and copper industries. From miners to producers, what these companies have in common is a strong correlation between their stock price and the strength of current economic conditions.
This is why basic materials companies are considered to be cyclical stocks. A well-timed investment at the beginning of an economic upswing can offer strong returns, but investing during a downturn may result in months or even years of mediocre performance.
Newmont does not release its trailing 12 month P/E ratio since its earnings per share of $-1.06 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for NEM of -38.2. Based on the company's positive earnings guidance of $2.63, the stock has a forward P/E ratio of 15.4.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US basic materials companies is 10.03, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of Newmont's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
NEM's gross profit margins have averaged 9.7% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -27.1%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Newmont's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,627,000 | 2,317,000 | 310,000 | -71.53 |
| 2022 | 3,220,000 | 2,131,000 | 1,089,000 | -58.53 |
| 2021 | 4,279,000 | 1,653,000 | 2,626,000 | -26.81 |
| 2020 | 4,890,000 | 1,302,000 | 3,588,000 | 153.93 |
| 2019 | 2,876,000 | 1,463,000 | 1,413,000 | 75.53 |
| 2018 | 1,837,000 | 1,032,000 | 805,000 |
- Average free cash flow: $1.64 Billion
- Average free cash flown growth rate: -14.7 %
- Coefficient of variability (the lower the better): 801.4 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NEM have received an annualized dividend yield of 4.2% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Newmont has a P/B ratio of 1.69. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Basic Materials sector, which stood at 2.08 as of the first quarter of 2023.
With a negative P/E ratio, an average P/B ratio, and a deteriorating pattern of cash flows with a downwards trend, we can conclude that Newmont is probably overvalued at current prices. The stock presents poor growth indicators because of its decent operating margins with a negative growth trend, and a negative PEG ratio.
