Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Newmont Corp (NEM, Financial). The stock, which is currently priced at $40.57, recorded a gain of 6.26% in a day and a 3-month increase of 5.19%. The stock's fair valuation is $65.06, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from GuruFocus's exclusive method. This value is calculated based on historical multiples, such as the PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted for the company's past returns and growth, and future estimates of business performance. Ideally, the stock price should fluctuate around the GF Value Line, with significant deviations indicating potential overvaluation or undervaluation.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Newmont should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of 1.79, and a five-year revenue/earnings decline. 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.
Financial Health Indicators: Piotroski F-Score and Altman Z-Score
The Piotroski F-score is a tool used to assess the strength of a company's financial health, based on nine criteria that fall into three categories: profitability, leverage/liquidity/source of funds, and operating efficiency. A score of 2, as in Newmont's case, indicates potential red flags for investors. The Altman Z-Score predicts the probability of a company entering bankruptcy within two years. A score below 1.8, like Newmont's 1.79, suggests a high likelihood of financial distress.
Company Overview: Newmont's Operations and Financials
Newmont is the world's largest gold miner with a rich history of acquisitions and joint ventures, including the recent purchase of competitor Newcrest in November 2023. Its portfolio consists of 17 wholly or majority-owned mines and interests in two joint ventures across the Americas, Africa, Australia, and Papua New Guinea. Newmont is expected to produce roughly 7.3 million ounces of gold in 2023 pro forma for Newcrest on an annualized basis. The company also produces significant amounts of copper, silver, zinc, and lead as byproducts. With about two decades of gold reserves and significant byproduct reserves post-Newcrest acquisition, Newmont's market cap stands at $49.50 billion, with sales of $11.10 billion and an operating margin of 9.93%.
Profitability Concerns: Newmont's Negative ROA Trend
One significant component of the F-Score is a positive return on assets (ROA). Newmont's ROA has shown a worrying trend of negative returns, indicating the company's inability to generate profit from its assets. The decline in ROA over the past three years—5% in 2021, 2.52% in 2022, and -2.11% in 2023—highlights a fundamental concern for any investor.
Liquidity Challenges: Newmont's Decreasing Current Ratio
Financial stability is key, and Newmont's decreasing current ratio over recent years—from 2.67 in 2021 to 2.12 in 2023—suggests a deteriorating ability to cover short-term liabilities with short-term assets. This declining liquidity indicates a growing risk in managing immediate financial obligations.
Operating Efficiency: Declining Gross Margin and Asset Turnover
Newmont's operating efficiency is also under scrutiny, with a decrease in gross margin percentage from 36.42% in 2021 to 23.76% in 2023. This contraction suggests rising costs or falling prices, which are negative indicators for profitability.
Breaking Down Newmont's Low Altman Z-Score
Newmont's Altman Z-score factors such as the Retained Earnings to Total Assets ratio and EBIT to Total Assets ratio have shown declining trends, indicating a weakening ability to reinvest profits or manage debt, and reduced operational effectiveness. These trends negatively impact the company's financial health and overall Z-score.
Conclusion: Is Newmont a Value Trap?
While the Piotroski F-score and Altman Z-score are not the only indicators of a company's financial health, they provide strong evidence of potential issues. Newmont's low scores in these areas, along with declining profitability and liquidity, suggest that this stock might indeed be a value trap. Investors should proceed with caution and consider these warning signs as part of their comprehensive due diligence process.
GuruFocus Premium members can find stocks with high Piotroski F-scores using the Piotroski F-score screener, and those with high Altman Z-Scores using the Walter Schloss Screen.
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.
