With a daily loss of -8.15% and a 3-month loss of -12.13%, Franco-Nevada Corp (FNV, Financial) has an Earnings Per Share (EPS) of 3.44. Despite these figures, the question remains: is the stock modestly undervalued? This article provides a comprehensive valuation analysis of Franco-Nevada, encouraging readers to delve into the following in-depth examination.
Company Introduction
Franco-Nevada Corp is a precious-metals-focused royalty and investment company. The company owns a diversified portfolio of precious metals and royalty streams, which is actively managed to generate the bulk of its revenue from gold, silver, and platinum. The company does not operate mines, develop projects, or conduct exploration. Franco-Nevada's short-term financial performance is linked to the price of commodities and the amount of production from its portfolio of producing assets. Its long-term performance is affected by the availability of exploration and development capital. The company holds a portfolio of assets, diversified by commodity, revenue type, and stage of a project, primarily located in the United States, Canada, and Australia.
At its current price of $126.27 per share, Franco-Nevada has a market cap of $24.30 billion, making it a significant player in the industry. But how does this compare to the company's GF Value, an estimation of fair value?
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock, derived from a unique method. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. This is calculated based on three key factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of business performance.
According to the GF Value calculation, Franco-Nevada's stock appears to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Evaluating Franco-Nevada's Financial Strength
Financial strength is a crucial factor to consider before investing in a company. Investing in companies with low financial strength could result in permanent capital loss. A good initial perspective on a company's financial strength can be gained by looking at the cash-to-debt ratio and interest coverage. Franco-Nevada has a cash-to-debt ratio of 10000, which ranks better than 99.96% of 2642 companies in the Metals & Mining industry. Based on this, GuruFocus ranks Franco-Nevada's financial strength as 9 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Franco-Nevada has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.20 billion and Earnings Per Share (EPS) of $3.44. Its operating margin of 60.5% is better than 97.59% of 870 companies in the Metals & Mining industry. Overall, GuruFocus ranks Franco-Nevada's profitability as strong.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Franco-Nevada is16.2%, which ranks better than 61.18% of 595 companies in the Metals & Mining industry. The 3-year average EBITDA growth is 18.5%, which ranks better than 60.35% of 1851 companies in the Metals & Mining industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Franco-Nevada's return on invested capital is 11.79, and its cost of capital is 7.34.
Conclusion
In conclusion, Franco-Nevada's stock appears to be modestly undervalued. The company's financial condition is strong and its profitability is robust. Its growth ranks better than 60.35% of 1851 companies in the Metals & Mining industry. To learn more about Franco-Nevada stock, you can check out its 30-Year Financials here.
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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.
