Eldorado Gold: Looking Back In The Past Is Always Worth It

| About: Eldorado Gold (EGO)

Summary

Analyzing what happened in the recent past is very important and, therefore, should also be taken into account before taking any kind of decision.

Q3, 2015 earnings announcement had no impact on the value of NYSE:EGO.

As of today 6 analysts out of 17 rate this stock as a "buy".

Last week I wrote an article about Eldorado Gold Corp (NYSE:USA) (NYSE:EGO) and I concluded that this gold stock looks overvalued at the moment by the market.

The article also contains a comment on Analysts' opinions and estimates which are very important because when company's releases not expected earnings and other financial results, it can produce important consequences on the stock market in terms of impact on the value of the stock.

"Great work, intereseting ideas. Possible to transfer them to other Gold miners. Thank you." (a comment to one of my previous article).

I agree with this commentator: analyzing what happened in the recent past is very important and, therefore, should also be taken into account before taking any kind of decision, and this is truth for both investors and traders.

I will examine the impact of the Q3, 2015 results (EPS) on the value of the gold stock.

Based on analysts estimates, investors and traders were expecting a EPS of $0.01 for Eldorado Gold Corp, but the company released EPS of -$0.01 (a difference of -$0.02 per share), a surprise of -200.00%.

According to the event study method, an announcements (in our case on EPS) is categorized as "Bad News", when EPS actual is more than 2.5% less than EPS estimate.

For this Bad News I will use the event study to measure its impact on the value of the stock.

"Eldorado Reports 2015 Third Quarter Financial and Operational Results

Eldorado Gold Corporation October 30, 2015 3:00 AM

Gold production of 183,226 ounces, All-In Sustaining Costs of $835 per ounce

TSX: ELD NYSE: EGO

VANCOUVER, Oct. 30, 2015 /PRNewswire/ - For the third quarter ended September 30, 2015, Eldorado Gold Corporation, ("Eldorado" or "the Company") reports gold production of 183,226 ounces (Q3 2014 - 192,578 per ounce) with average cash costs of $552 per ounce (Q3 2014 - $488 per ounce). Adjusted net loss for the quarter was $4.0 million ($0.01 loss per share) compared to a $36.1 million profit ($0.05 per share) in Q3 2014."(here).

Event window (from October 2, 2015 to November 30, 2015): 20 days prior to the event day plus the event day plus 20 days post the event day.

So I will estimate the 2-factor model parameters (intercept and the beta coefficients of the function Rego = f(Rmkt; Rcomex.), where Mkt = S&P 500, over the 250 days prior to the event period (estimation window).

I get statistically significant regressors with a 2-factor model:

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Intercept

-0,001723436

0,002418

-0,71275

0,476675

-0,00649

Rsnp500

1,141722242

0,253865

4,497365

1,06E-05

0,641707

Rcomex

2,178761911

0,249887

8,719002

4,19E-16

1,686582

Click to enlarge

Returns on NYSE:EGO are more volatile than returns either on the S&P 500 and The COMEX (Gold Commodity), and statistically significant.

Rego* = -0,001723436 + 1,141722242*Rmkt + 2,178761911*Rcomex is the mathematical expression that roughly summarizes the normal return of NYSE:EGO.

The table represents the abnormal returns of Eldorado Gold Corp as well as the cumulative abnormal returns for earnings announcement of October 30, 2015, categorized as 'Bad News' since NYSE:EGO's actual EPS was minus 200% than expected:

For this 'Bad News', the negative abnormal return of the event day is -3.6%, with a standard error of 0,038221066 leading to an AR t-test value of -0.9422 (more than - 1.96). There is no evidence against the null-hypothesis, H0, that the event has no impact on the value of NYSE:EGO.

But 14 days prior the event day, on October 12, 2015, the abnormal return on NYSE:EGO was -8.43% and statistically evident, after a short period of raising along with gold prices and some analysts' forecasts on U.S. central bank interest rates.

"NEW YORK (TheStreet) -- Shares of Eldorado Gold (EGO - Get Report) were gaining 6.3% to $3.88 on Tuesday as gold prices ticked higher due to weakness in the dollar.

U.S. gold futures for December delivery were up 1% to $1,149 an ounce on the Comex on Tuesday morning.

Prices of the precious metal were higher as the dollar weakened as a result of doubts that the Federal Reserve will raise interest rates this year, according to Reuters. Some analysts said the U.S. central bank likely won't raise interest rates this year following a soft September jobs on Friday, according to the news service. […]" (here).

And

"The minutes from the Fed's policy meeting in September suggest the U.S. central bank is in no rush to raise interest rates, according to Reuters. The minutes suggest the Fed was cautious about raising rates before the release of September's weak jobs data report."(here).

On October 12, 2015, NYSE:EGO closed at $3.68 per share close to its low price of $3.65 (day's high price was $4.04 per share); 04.61m shares exchanged.

Click to enlarge

Financial news were reporting NYSE:EGO as a sell, driven by some concerns seen in multiple areas of the company such as its unimpressive growth in net income, weak operating cash flow and generally disappointing historical performance in the stock itself. (here).

On October 15, 2015 the stock closed at $4.11 per share (High: $4.14; Low: $3.94) and on October 29, 2015 the stock closed at $3.70 (High: 3.85; Low: $3.64). The stock fell by almost 10% in just 2 weeks.

On October 30, 2015, the stock closed at $3.50 per share, 2 cents less than the average share price calculated over the period from October 2, 2015 to November 30, 2015.

Price:

Eldorado Gold Corp closed at $2.22 (adjusted close $ 2.32) with 3,563,528 traded on February 01, 2016. The share price ranged between a low of $2.24 and a high of $2.42.

The company has a market cap of $1,59M and the number of outstanding shares is 716.59M. The 52-week high of NYSE:EGO is $4.54 and the 52-week low is $1.87.

Analysts opinion:

On a scale of 1 to 5 where 1 is a Strong Buy and 5 is a Strong Sell, the stock is ranked 2.5 based on 16 sell-side broker recommendations.

Of the 16 analysts estimates, the most bullish sees the stock reaching $6.00 within the next 12 months while the most bearish analyst sees the stock at $2.15 within the year.

From a total of 17 analysts covering NYSE:EGO stock, 0 rate it a "Strong Buy", 6 a "Buy", 10 a "Hold" and 1 a "Sell".

Despite 6 analysts (35%) on 17 rate this stock as a "buy", on the basis of my point of view Eldorado Gold Corporation is overvalued at the moment by the market. You can read it here.

Conclusion

Q3, 2015 earnings announcement had no impact on the value of EGO because based on prior financial news the stock was already getting a "sell" rating by analysts.

On a scale of 1 to 5 where 1 is a Strong Buy and 5 is a Strong Sell, the stock is ranked 2.5 based on 16 sell-side broker recommendations.

But according to my previous article analysis EGO is not a buy today since the stock looks to me being still overvalued by the market (my point of view).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.