It's been a busy past month in the precious metals space, with the Gold Miners Index finally undergoing a much overdue correction. The index has tumbled nearly 15% from its highs, and the correction has helped investors separate the wheat from the chaff in the sector. The stocks that have struggled most of the year remain stuck in the mud for the most part, while the leaders have held up relatively well. Fortunately, for investors that selected Barrick Gold (GOLD) as a vehicle to play the move in gold, the company continues to fire on all cylinders. On a technical basis, the stock remains strong and continues to trade above its key moving averages. On a fundamental basis, earnings estimates continue to be revised higher, a bullish sign. While this correction may have spooked some investors, I continue to see the stock as a hold within the sector. Corrections are completely normal after a 70% advance, and they typically provide buying opportunities for those patient enough to wait for better prices. I would view any 12% plus corrections from highs in Barrick Gold as buying opportunities.
The past month has seen some significant moves in the gold sector, with some producers tumbling 20% from their highs. While these corrections may be enticing many investors to jump in, I see the majority of these names as much less desirable. Any stock that becomes unhinged to the tune of 25% during a minor correction for gold is likely a laggard. I would much prefer to stick to the leaders in the space. A few of these laggards are McEwen Mining (MUX), Eldorado Gold (EGO), and New Gold (NGD). Rather than try to buy the stocks with the largest corrections (often for a good reason), I prefer to focus on the leaders when a sale shows up. Barrick Gold continues to be one of the leaders, with earnings expected to grow more than 100% from FY-2018 through FY-2020. For this reason, I am reiterating my stance on the stock as a hold and would view further weakness in the stock below $16.80 as a buying opportunity.
Just over two months ago, I wrote on Barrick Gold and discussed how earnings estimates continued to get revised higher for the company. This is generally a very bullish sign, as stocks follow earnings per share over the long term. Simply, any company that is appreciating in share price but is not seeing earnings per share growth is a red flag. Momentum may win out over the short term, but earnings per share always wins in the long term. While cyclical sectors like gold miners are typically not an area where I would consider investments, Barrick Gold has finally cleaned up its act. The company has gone from one where write-downs were commonplace, to a company stressing cost-cutting, and delivering on expectations.
(Source: Author's Chart)
As can be seen above, the company has enjoyed five years in a row of all-in sustaining costs averaging below $850/oz, with FY-2019 guidance expected to come in just below $900/oz. These figures are in line with the average all-in sustaining costs of major producers, but I expect them to trend lower into FY-2020. This is because the company should benefit from synergies with its Newmont Goldcorp (NEM) Nevada joint-venture. The company has already shown execution in the cost-cutting department with G&A guidance for FY-2019 below $150 M, down from $275 M in FY-2018. This is a massive decrease of 45% year-over-year despite the same production profile. Let's take a look at how this has translated to the company's growth metrics:
Looking at the chart I've built below annual earnings per share [EPS], we can see that the company is expected to see two years in a row of annual EPS growth. FY-2019 earnings per share growth is currently pegged at 43% growth year-over-year, up from $0.35 in FY-2018 to estimates of $0.50 for FY-2019. It's important to note that this figure of $0.50 in EPS for FY-2019 continues to get revised higher, as it was sitting at $0.43 to end the month of July. This is a bullish sign. While earnings per share growth is excellent, earnings per share growth combined with upward earnings revisions is usually a slam-dunk on an intermediate basis.
For FY-2020, earnings estimates are currently sitting at $0.73 per share, representing growth of 46% year-over-year. Ultimately, I would expect revisions to push this closer to $0.75-0.77 for FY-2020 if the gold price can hold above $1,480/oz to end 2019. These estimates are also up sharply, being revised higher by 15% over the past two months.
(Source: YCharts.com, Author's Chart)
Looking at revenue growth, there are tons of things to like here, as well. As we can see, revenue growth rates have gone from a slump in the negative territory to a new trend higher. I like to use a two-quarter average revenue growth rate for companies as this better defines the trend in revenue growth rates. The reason for this is that single quarters can often be quite lumpy, which can distort the real trend. Looking at both quarterly revenue growth rates (blue line) and two-quarter average revenue-growth rates (white line), both are trending higher. Revenue estimates for Q3 are currently sitting at $2.34 billion, and this will translate to 28% growth year-over-year. If the company can hit these analyst estimates, this will be a further acceleration from 17% and 21% in Q1 and Q2, respectively. Ideally, investors are going to want to see a minimum of $2.30 billion for the quarter. A beat on the $2.35 billion estimates would be a very bullish development.
(Source: YCharts.com, Author's Chart)
Based on the fact that annual EPS is growing in lockstep with accelerating revenue growth, the upward earnings estimates look sustainable. The best predictor of future earnings growth is an acceleration in revenue growth, and that's exactly what we see here. For this reason, Barrick's growth metrics remain bullish on all fronts. The fact that the company discussed last month it's tracking in the higher end of its annual guidance is a positive sign. So why has the stock corrected with such impressive growth metrics? Simple. What goes up must eventually come down, or correct, in Barrick Gold's case.
The February through July 2016 rally in gold stocks may have made some believe that things go up in a straight line, but contrary to popular belief, this isn't how things normally work. Barrick Gold gained over 70% from its May lows, and a 15% correction would be entirely reasonable to shake out some weak hands. When a stock moves into vogue, it often undergoes a correction, and Barrick was clearly in vogue during late August with several bullish articles on the stock. The good news is that investors should be embracing 12-15% corrections in the stock, not getting spooked. Let's take a look at the technical picture:
Starting with a monthly chart of Barrick, we can see the stock remains in the bullish zone, displayed by green shading. These separate shaded zones display when the stock is above or below its 20-month moving average, and we want to hold the stock when it's in the green zone. The stock's 20-month moving average has also turned higher to assume a positive slope in October and is now moving up at a pace of $0.35 per month. As long as the bulls defend the 20-month moving average, I would consider sharp corrections as buying opportunities. I would expect the 20-month moving average (teal line) to be at the $14.50 level to finish November.
Moving to a daily chart, Barrick broke out of a multi-month base in July and now has a rising 200-day moving average. Upper support on the stock comes in at the $15.80 level, with strong support at the $14.20 level. As long as the stock holds above the $15.80 level on a weekly close, I would consider any 12% plus corrections to be noise. This means that they are simply normal corrections to be expected after the velocity of the prior uptrend. Strong resistance for the stock sits at $20.30 on a weekly close. I believe this is an opportune area to book partial profits on the stock, such as 1/3 of one's position for traders.
As we can see from the above chart, both the 200-day moving average (blue line) and $15.80 support are likely to converge later this month. I'd expect buyers to step up in a big way if we do see further weakness. As long as $15.80 is not lost on a weekly close, I see no reason to entertain a drop-down towards strong support at $14.20. Based on the fact that Barrick continues to make higher highs and higher lows, the stock remains a buy on weakness below $16.80 and a hold otherwise.
Barrick Gold has the total package currently in the gold sector with robust annual EPS growth, accelerating revenue growth, margin expansion, and a strong new uptrend. Corrections of 12-20% are possible along the way, but they are likely going to present buying opportunities for investors. Investors are going to want to see $2.30 billion or better in revenues for Q3 2019, with a beat above $2.35 billion being a bonus. If the company can beat on Q3 2019 estimates and come in above $2.37 billion, a move above the $20.30 level by January is certainly a possibility.
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.