Since setting a record new high in August 2020, gold has significantly underperformed the stock market despite surging inflation. Over the last six months, gold has meandered in a $1,725-$1,870 trading range, notes Kuen Chan, editor of The Complete Investor.
Whatever the reason — cryptocurrencies attracting investor funds, investor expectations of higher interest rates, or possibly even market manipulation — gold has yet to show its typical strength in inflationary environments. So is gold down for the count? Absolutely not. The case for gold remains compelling.
Franco-Nevada (FNV) — a royalty/streaming specialist — is our favorite gold company. One reason gold stocks have largely underperformed gold is concern over inflation-driven cost increases. But that’s less of a concern for Franco-Nevada, since it doesn’t actually operate mines. This means less direct exposure to cost inflation, along with avoiding the sizable normal operating risks that go with mining.
In fact, the company’s profit margin has actually widened. Through the first nine months of 2021 (Q4 results not available as of writing), revenue rose 36% compared to the like 2020 period, while earnings per share were up 44%, to $2.67 (though the increase in the third quarter was a more modest 9% due to a tougher benchmark).
The latest 15.4% dividend boost, resulting in a quarterly rate of $0.30, is the largest in company his- tory, a sign of robust cash flow. Franco-Nevada benefits from production growth as the mines in which it owns an interest come online or expand output.
While gold is Franco-Nevada’s bread and butter business, energy along with base metals and platinum group metals offers diversification.
The company’s balance sheet is pristine, with zero debt and $1.6 billion in available capital. Keep in mind that given its business model and financial strength, even a gold bear market wouldn’t be the worst thing because it could allow Franco-Nevada to scoop up additional assets from potentially distressed miners at more favorable terms.
The forward P/E of almost 45 is a substantial premium over other gold stocks. For example, the weighted average forward P/E of GDX’s components is around 17.
However, given Franco-Nevada’s consistent earnings growth — compounded annual EPS growth of 28% since 2010 — its attractive business model that has proven its mettle in good times and bad, and its excellent management team, we think the premium is well deserved, and we view Franco-Nevada as a core gold holding.