With an average analyst rating of buy, Newmont is clearly an analyst favorite. But the analysts could be wrong. Is NEM overvalued at today's price of $47.0? Let's take a closer look at the fundamentals to find out.
The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's assets minus its liabilities -- you can also think of it as the company's equity value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Newmont is 1.88, compared to its sector average of 2.69 and the S&P 500's average P/B of 4.71.
Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 47.0 divided by either its trailing or forward earnings, which for Newmont are $-3.27 and $4.67 respectively. Based on these values, the company's trailing P/E ratio is -14.4 and its forward P/E ratio is 10.1. By way of comparison, the average P/E ratio of the Basic Materials sector is 23.66 and the average P/E ratio of the S&P 500 is 28.21.
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Newmont's ability to meet its debt obligations is also an important aspect of pinning down its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 0.573. Since NEM's is lower than 1, it does not have the liquidity necessary to meet its current liabilities.
One last metric to check out is Newmont's free cash flow of $97.0 Million. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Newmont to keep paying its 2.7% dividend.
Shares of Newmont appear to be overvalued at today's prices — despite the positive outlook from analysts. But sometimes stocks with inflated valuations turn out to be strong performances for years, and even decades, such as Amazon. So be sure to do your own due diligence if you are interested in taking a long position in NEM.
