Franco-Nevada Up 48% in a Year: What's Driving the Rally?
Franco-Nevada Corporation FNV is well poised to gain from its robust portfolio of streaming and royalty agreements, debt-free balance sheet, a well-diversified model, and expected savings from its focus on cost management. The company’s shares have gained 48% over the past year, compared with the industry’s rally of 44.8%. Notably, the S&P 500 rallied 11.3% in the said period.
The solid performance can be attributed to an impressive earnings surprise trend. Franco-Nevada’s earnings beat estimates in each of the trailing four quarters, the average surprise being 12.6%. The company has also been delivering growth in both its top and bottom lines in the past six quarters. The trend is expected to continue in the near term, supported by the rally in gold prices and the company’s cost control efforts amid COVID-19 woes.
Franco-Nevada has a market capitalization of $27 billion. Average volume of shares traded in the past three months was 781.38k. It has a long-term estimated earnings per share growth rate of 4%.
Let’s delve deeper and analyze the factors driving the stock.
Driving Factors
Franco-Nevada sold a record 516,438 GEO in 2019. Over the five-year period, its GEOs sold have increased over 40%. The largest increase in GEO sold is from gold assets, of which, Cobre Panama is the largest component. The company expects attributable royalty and stream sales in the range of 475,000 to 505,000 GEOs from its mining assets in 2020.
Given that major portion of the company’s revenues is sourced from gold compared to other metals, the rally in gold prices this year bodes well for its top-line performance. The yellow metal has gained 26% so far this year primarily owing to the coronavirus pandemic. With the pandemic showing no signs of abating any time soon, the ongoing uncertainty regarding its impact on the global economy will continue to trigger safe haven demand for gold, thus fueling its prices. This is likely to get reflected in Franco-Nevada’s top line performance in the forthcoming quarters.
One of the inherent strengths of its business model is the diversification of portfolio. Two of its assets, Candelaria and Antapaccay, accounted for 12% of its revenues individually for 2019 followed by Cobre Panama with a contribution of 8% — taking the total to 32%. Further, no legal entity accounts for more than 50% of its revenues. It has operator diversification as well. Some of its mining operators have been facing the unfavorable impact of the coronavirus outbreak, which includes temporary suspension of operations and production curtailment. Notably, the company’s operator diversification will help negate the overall impact on revenues.
Also, given its sustained focus on cost management, Franco-Nevada continues to generate high margins. Notably, the cash costs per GEO (Cost of sales, less depletion and oil and gas costs, divided by gold equivalent ounces) was $266 in 2019, seeing a CAGR of 3% during the 2015-2019 period. During this time, its margins witnessed a CAGR of 5%. Hence, the combination of high gold prices and low costs will bolster margins.
Franco-Nevada is financially strong and has a debt-free balance sheet. As of Jun 30, 2020, the company has $1.7 billion of available capital. Thus, the company is well positioned to make further investments to grow its diversified portfolio of assets despite the troubled times. Notably, while other companies have been suspending dividends or refraining from dividend hikes owing to the coronavirus-induced crisis, Franco-Nevada’s board of directors declared a 4% hike in dividends in May.
Positive Growth Projection
Earnings estimates for 2020 and 2021 have moved north by 4% and 7%, respectively, in the past 60 days. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $2.30 per share, suggesting year-over-year growth of 26.4%. The same for 2021 stands at $2.91, indicating year-over-year improvement of 26.8%.
Zacks Rank & Stocks to Consider
Franco-Nevada currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space DAQO New Energy Corp. DQ, Pan American Silver Corp. PAAS and The Scotts MiracleGro Company SMG. All of these stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
DAQO New Energy has a projected earnings growth rate of 349% for the current year. The company’s shares have gained 119% in a year’s time.
Pan American Silver has an estimated earnings growth rate of 13% for fiscal 2020. Its shares have appreciated 86% over the past year.
Scotts MiracleGro has an expected earnings growth rate of 60% for fiscal 2020. Over the past year the company’s shares have surged 47%.
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