Earnings

A Side-by-side Analysis of Newmont Mining Corporation (NEM) and Vista Gold Corp. (VGZ)

Newmont Mining Corporation (NYSE:NEM) shares are up more than 6.25% this year and recently decreased -1.05% or -$0.38 to settle at $35.82. Vista Gold Corp. (NYSE:VGZ), on the other hand, is down -32.70% year to date as of 12/05/2017. It currently trades at $0.64 and has returned -7.44% during the past week.

Newmont Mining Corporation (NYSE:NEM) and Vista Gold Corp. (NYSE:VGZ) are the two most active stocks in the Gold industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect NEM to grow earnings at a 3.02% annual rate over the next 5 years.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Newmont Mining Corporation (NEM) has an EBITDA margin of 7.73%. This suggests that NEM underlying business is more profitable

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. NEM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.84. Comparatively, VGZ’s free cash flow per share was -0.02.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NEM has a current ratio of 4.20 compared to 15.40 for VGZ. This means that VGZ can more easily cover its most immediate liabilities over the next twelve months. NEM’s debt-to-equity ratio is 0.36 versus a D/E of 0.00 for VGZ. NEM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NEM trades at a forward P/E of 26.31, a P/B of 1.73, and a P/S of 2.68, compared to a P/B of 1.95, for VGZ. NEM is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. NEM is currently priced at a -15.4% to its one-year price target of 42.34. Comparatively, VGZ is -71.56% relative to its price target of 2.25. This suggests that VGZ is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for NEM and 2.00 for VGZ, which implies that analysts are more bullish on the outlook for NEM.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NEM has a beta of 0.10 and VGZ’s beta is -1.98. VGZ’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NEM has a short ratio of 2.20 compared to a short interest of 7.56 for VGZ. This implies that the market is currently less bearish on the outlook for NEM.

Summary

Vista Gold Corp. (NYSE:VGZ) beats Newmont Mining Corporation (NYSE:NEM) on a total of 8 of the 13 factors compared between the two stocks. VGZ is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, VGZ is the cheaper of the two stocks on an earnings and sales basis, VGZ is more undervalued relative to its price target. Finally, CNC has better sentiment signals based on short interest.

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