- Franco-Nevada reported earnings yesterday, beating both top-line and bottom-line estimates, with a record year across the board.
- The company reported revenue of $258.1 million in Q4, up 74% year over year, and more than twice the revenue growth rate of the industry average.
- Based on the company's continued operational excellence and 20% earnings growth expected in FY-20, I continue to see the stock as a Hold, and believe recent correction is noise.
We're now more than 90% through the Q4 earnings season for the gold miners (GDX), with significantly improved performance from a rather sluggish Q3. Thus far, more than 60% of companies have managed to beat earnings estimates, and we've seen companies beating sales estimates jump to nearly 50%. Franco-Nevada (NYSE:FNV) is the most recent miner to report its earnings, and the company has beaten on both the top line and bottom line yet again, trouncing estimates, and putting up 57% annual earnings per share (EPS) growth for the year. The company's revenue growth rate is tracking well above the industry average of 27.71%, and FY-2020 earnings estimated are projecting another double-digit year for annual EPS growth. Based on the company's continued position as a leader in the sector, I continue to remain long the stock and see Franco-Nevada as a Hold.
Franco-Nevada is the most recent miner to report earnings, and the stock has crushed estimates for the second quarter in a row. The company reported record quarterly revenue of $258.1 million in Q4 2019, and $844.1 million in revenue for the year. The company's record sales of gold-equivalent ounces (GEOs) contributed to this strong year, as the company sold 516,438 GEOs for the year, and over 153,396 in Q4 alone. The company has guided for further growth to 565,000 GEOs in FY-2020, an increase of nearly 10% year over year. If the company can meet these estimates, I believe that the current earnings estimates for $2.22 in FY-2020 will be on the conservative side, and I believe we could see $2.27 or higher in EPS for FY-2020. Let's dig into the results a little closer below:
One of the most significant contributors to Franco-Nevada's growth going forward is First Quantum's (OTCPK:FQVLF) Cobre Panama mine in Panama, which achieved commercial production finally in Q4 of last year. The mine is one of the largest copper-gold-silver porphyry deposits in the world, and First Quantum anticipates being able to grow production to over 300,000 tonnes of contained copper in FY-2020. This equates to payment to Franco-Nevada of 94,000 ounces of gold and over 1 million ounces of silver, and production is likely to grow even further at Cobre Panama by FY-2023. First Quantum has already looked into a study to increase throughput to over 100 million tonnes per annum, which would push production to 375,000 tonnes of contained copper by year five for the mine. Thus far, Franco-Nevada's $1.35 billion bet on Cobre Panama is paying off, and the project is ramping up smoothly and has provided a massive boost to the company's revenue. As the chart below shows, Franco-Nevada's attributable GEOs are set to nearly double next year alone from Cobre Panama.
If we look at a chart of long-term growth potential for Franco-Nevada, we can see that gold-equivalent ounce sales are nowhere near their peak, despite a slight drop-off from FY-2017 to FY-2018. If we look ahead to FY-2023, Franco-Nevada sees the potential for total gold-equivalent ounce sales of nearly 600,000 by FY-2023, and updated guidance for sales of 595,000 gold-equivalent ounces by FY-2024. This is more than 15% above current levels and should provide a path to steady earnings growth going forward. The noticeable tailwind to these earnings is the gold price (GLD), which continues to climb, and is allowing for further margin expansion for Franco-Nevada based on the company's ultra-low cash costs of $266/oz. This continued increase in gold-equivalent sales is based on continued production growth at Cobre Panama, normalization of production at Candelaria, as well as a minor benefit from Kinross Gold's (KGC) Tasiast Phase 2 expansion.
Taking a look at Franco-Nevada's earnings trend below, we can see that it's one of the strongest in the industry, with annual EPS sitting at all-time highs. Franco-Nevada is one of the only gold companies in the Gold Miners Index with annual earnings per share at all-time highs, and we should see new highs for annual EPS in FY-2020 and FY-2021 as well. The other rare distinction that Franco-Nevada has from its peers is the company's consistent double-digit annual EPS growth rate, which makes the stock not only a solid gold company but also a growth stock. The companies with the most substantial returns generally have 20% or higher annual EPS growth consistently, and Franco-Nevada is one of the few gold companies with this impressive title. Based on FY-2020 estimates of $2.22, Franco-Nevada should be able to grow annual EPS by 21% in FY-2020, after lapping a year of incredible 57% growth.
While there are quite a few gold miners with strong double-digit growth in annual EPS expected in FY-2020 and FY-2021, this growth is being achieved well below earnings-highs. The difference with Franco-Nevada is that this growth is occurring at all-time highs for EPS, and therefore is not merely gaining back lost ground in earnings from the prior bull market (2002-2011). This is an important differentiator for the company, as the most critical metric from an investment standpoint, in my opinion, is the continued value returned through higher earnings per share. It certainly doesn't hurt that Franco-Nevada has paid a consistent 1% dividend yield while still being able to fund its growth initiatives. This distinction makes it by far the most attractive way to play the gold sector on a risk-adjusted basis. While FY-2021 EPS is expected only high single-digit growth based on estimates of $2.34, I believe both the FY-2020 and FY-2021 estimates are on the conservative side. My estimates for FY-2020 are $2.26 in annual EPS and over $2.40 in yearly EPS for FY-2021.
If we move over to sales growth, we can see an encouraging pattern here, as we see an acceleration in revenue growth rates to confirm this growth in annual earnings per share. As noted earlier, Franco-Nevada reported $258.1 million in revenue for Q4 2019, up 74% year-over-year, and the strongest quarter of growth in several years for the company. This translated to a sequential acceleration of over 3000 basis points in the two-quarter average (white line), and this acceleration is likely to continue into Q1 2020 as well. Based on Q1 2020 estimates of $268.8 million in revenue, Franco-Nevada is expected to see year-over-year revenue growth for the quarter of 50%, and the two-quarter average will push to a new high at 62%. This is excellent news for the company, as revenue growth provides for the most sustainable growth in annual EPS. While any company can see a short-term tailwind to earnings through cut-backs, tax benefits, or one-time items, a new trend higher in revenue growth rates is rare and certainly worth paying attention to for investors.
Based on the fact that Franco-Nevada is expected to see double-digit annual EPS growth in FY-2020, and is enjoying revenue growth rates that are double the industry average (74% vs. 28%), I continue to see the stock as a leader fundamentally in the sector. Thus far, funds seem to agree with this belief, as we have seen significant growth in funds holding the stock, up from 1022 in Q1 2018 to 1295 in the most recent filing. This is another rare quality that Franco-Nevada has over its peers, as most gold miners have seen much more moderate increases in fund ownership the past two years. This bodes well for Franco-Nevada as ultimately, it is increased fund ownership that propels a stock higher long term. Let's take a look at the technicals and see if they are confirming this:
As we can see in the yearly chart below, Franco-Nevada is one of the few gold stocks at all-time highs, and also one of the few that is up more than 5% year to date given the (-) 7% year-to-date return in the Gold Miners Index. This suggests that the stock continues to be a leader, as it does not need the strength of the Gold Miners Index to allow it to move higher. As long as the stock continues to hold above Q3 lows of $90.00, I believe the stock is a Hold. While 10-15% pullbacks like we've seen recently may be frustrating for short-term traders that paid too much, they do nothing to dent the bigger picture technical here, which suggests higher prices in 2020.
Few companies in the gold sector are consistently beating earnings, enjoying massive annual earnings per share growth, while also seeing sales growth come in at 100% above the industry average. Fortunately, for investors parked in Franco-Nevada, this is the case currently, and continues to support higher prices long term for the stock. Based on this, I see no reason to worry about the recent 10% correction, and I continue to see the stock as a Hold as long as the bulls defend the $90.00 level. Ultimately, I would not be surprised if Franco-Nevada finished 2020 at above $125.00 per share.
This article was written by
Analyst’s Disclosure: I am/we are long GLD, FNV. 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.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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