Value-focused investors often seek stocks priced below their intrinsic value. One such stock that has caught the attention of many is Newmont Corp (NEM, Financial). Currently priced at 36.87, the stock recorded a gain of 1.42% in a day and a 3-month decrease of 11.12%. According to its GF Value, the stock's fair valuation is $68.81.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value that the stock should be traded at. This calculation is based on three factors: Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Delving Deeper into Newmont's Value
Despite its seemingly attractive valuation, certain risk factors associated with Newmont (NEM, Financial) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.35. These indicators suggest that Newmont, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-score
The Altman Z-score, invented by New York University Professor Edward I. Altman in 1968, is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot
Newmont is the world's largest gold miner, producing about 6 million attributable ounces of gold in 2022, good for about 5% of global mined output. The company also produced 1.3 million attributable gold equivalent ounces from the sale of byproducts, including copper, silver, zinc, and lead in 2022. It had about two decades of gold reserves along with significant byproduct reserves at end 2022. After buying Goldcorp in 2019 and combining its Nevada mines in a joint venture with competitor Barrick later that year, Newmont's portfolio includes 12 wholly owned mines and interests in two joint ventures in the Americas, Africa, and Australia.
Breaking Down Newmont's Low Altman Z-Score
A dissection of Newmont's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Newmont's historical data, 2021: 0.10; 2022: 0.08; 2023: 0.02, we observe a declining trend in this ratio. This downward movement indicates Newmont's diminishing ability to reinvest in its business or effectively manage its debt, consequently exerting a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Newmont's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.02; 2023: 0.00) indicates a descending trend. This reduction suggests that Newmont might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion
In conclusion, despite Newmont's seemingly attractive valuation, the company's low Altman Z-Score and declining financial ratios suggest that it might be a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
