2 Gold Stocks To Buy, 1 To Hold
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During macro uncertainty, it is no secret that gold is viewed as the go-to hedge against inflation. With the federal government unwilling to commit itself to long-term entitlement cuts, I believe fears over inflation are here to stay. At the same time, I would not bet on the price of precious metals. It is much safer to look at volumes where organic improvements can be made, seen, and better explained. In my view, Freeport (NYSE: FCX) and Goldcorp (NYSE: GG) are "buys" while Kinross Gold (NYSE: KGC) is a "hold".
Freeport trades at a respective 10.7x and 7.4x past and forward earnings with a dividend yield of 3.5%. It is forecasted for 4.5% annual EPS growth over the next 5 years and is, fortunately, diversified in both copper and gold to mitigate much of the risk inherent in basic materials.
During the second quarter, sales were weak but relatively in-line with expectations. 1B pounds of copper and 356K ounces of gold were sold - results largely arising from poor ore grades and production rates in Indonesia. The market has actually seen shareholder value gain 6.4% despite the soft performance. And for good reason: development in Cerro Verde and Tenke remain major catalysts with the former forecasted to see incremental production of 600M lbs of copper each year and the latter forecasted to see incremental production of 150M lbs of copper each year. While management has had labor problems in the recent past, concessions are less of a problem know given a likely greater political support weary about the poor economy. Construction at Tenke is expected to be completed by 2013.
Going forward, the company is not resting on their laurels. $275M worth of exploration this year is more than $50M last year. After offering the Indonesian government a greater stake in the company, bargaining power over labor has been substantially increased. ROA, ROE, and ROI are all in the solid double-digits and support and impressive growth story. Accordingly, analysts rate the stock around a "strong buy" according to data from FINVIZ.com.
Goldcorp may appear fairly expensive at a respective 22.5x and 13.2x PE and forward PE multiple, but the growth potential is strong. 17.1% annual EPS growth is forecasted over the next 5 years. Furthermore, the company has a very clean balance sheet with little debt and high liquidity, as evidenced by the 2.92 current ratio and 0 debt-to-equity ratio.
During the second quarter, management released very disappointing results. Quarterly EPS of $0.34 was 17.1% below consensus and followed a 7.4% miss in the preceding quarter. Unfortunately, very little to none of this weakness has been factored into the stock price, as evidenced by how Goldcorp has outperformed peers over the last 3 and 6 month periods. In the former time period, in fact, the company has appreciated by 6.8%. During 2Q12, Goldcorp had negative growth of 15.9% - the first decline since three years ago. High double-digit top-line growth from quarter to quarter has, however, been impressive and warrants a high trading multiple. As it stands, the PE multiple is well below the historical 5-year average of 35x and relatively near the minimum of 15.5x. Free cash flow generation over the TTM has, however, been very volatile and makes Goldcorp a riskier investment than Freeport for all of its labor problems. I nevertheless recommend making an investment to capitalize off of the impressive growth and inflationary fears (pun intended).
Kinross is roughly a "hold" on the Street, according to FINVIZ.com, but it still trades attractively at 7.3x forward earnings and 0.7x book value. Over the past 5 years, EPS has grown 21.4% annually. What is disconcerting going forward is how ROA, ROE, and ROI have all been solidly negative in the double-digits. The stock is valued at exactly one-half of where it was 12 months ago, and it is now near the 52-week low. The question is how much the stock will recover, if any. The S&P 500 has outperformed by nearly 6,700 bps and any stock picking strategy should be weighed against simple ETF investing.
The average PE multiple of the firm has been 28.5x over the past 5 years. Free cash flow has flung into nearly half a billion loss over the twelve trailing months in 1Q12. Volatility over FCF makes Kinross a highly speculative investment. Long-term debt has almost tripled from $574.5M in October 2007 to $1.6B in April 2012. Gross margins have also fallen more than 1,000 bps below the 5-year 51.4% average. I thus recommend not accumulating any more shares.
If you have already invested in Kinross, I would recommend holding only under the assumption that job figures fail to beat economist forecasts. This is really a matter of personal opinion, since it is relative to a bar. Job hiring in the latest report was better-than-expected but unemployment is still far too high. The sovereign debt crisis in Europe further strengthens the gold thesis. Under such a climate, I recommend holding.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.