Global

Comparing Lloyds Banking Group plc (LYG) and Newmont Mining Corporation (NEM)

Lloyds Banking Group plc (NYSE:LYG) shares are down more than -18.67% this year and recently increased 2.01% or $0.06 to settle at $3.05. Newmont Mining Corporation (NYSE:NEM), on the other hand, is down -18.55% year to date as of 10/10/2018. It currently trades at $30.56 and has returned 0.26% during the past week.

Lloyds Banking Group plc (NYSE:LYG) and Newmont Mining Corporation (NYSE:NEM) are the two most active stocks in the Foreign Money Center Banks industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LYG to grow earnings at a -3.50% annual rate over the next 5 years. Comparatively, NEM is expected to grow at a 2.82% annual rate. All else equal, NEM’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 29.71% for Newmont Mining Corporation (NEM). LYG’s ROI is 6.10% while NEM has a ROI of 5.90%. The interpretation is that LYG’s business generates a higher return on investment than NEM’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, LYG’s free cash flow was 0% while NEM converted 0.94% of its revenues into cash flow. This means that, for a given level of sales, NEM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

LYG’s debt-to-equity ratio is 2.23 versus a D/E of 0.38 for NEM. LYG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LYG trades at a forward P/E of 8.97, a P/B of 0.87, and a P/S of 2.59, compared to a forward P/E of 20.86, a P/B of 1.51, and a P/S of 2.23 for NEM. 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. LYG is currently priced at a 0.99% to its one-year price target of 3.02. Comparatively, NEM is -27.99% relative to its price target of 42.44. This suggests that NEM is the better investment over the next year.

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. LYG has a beta of 0.83 and NEM’s beta is 0.30. NEM’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. LYG has a short ratio of 0.36 compared to a short interest of 1.70 for NEM. This implies that the market is currently less bearish on the outlook for LYG.

Summary




Newmont Mining Corporation (NYSE:NEM) beats Lloyds Banking Group plc (NYSE:LYG) on a total of 10 of the 14 factors compared between the two stocks. NEM generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. NEM is more undervalued relative to its price target. Finally, LUV has better sentiment signals based on short interest.

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