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 MARKET REPORTS |
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Analyst report - shares
Good conditions for Newcrest bodes well for share price
March 5, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Newcrest Mining Limited
Stock code: NCM
Current share price: $38.00
1 year high/low: $20.20/$39.75
This week Tim Lincoln profiles Newcrest Mining Limited (NCM), and illustrates the importance of assessing Earnings per Share (EPS) growth when considering a company as a potential investment opportunity.
Newcrest Mining Limited (NCM)
Operations
NCM is Australia’s largest gold producer with a portion of revenue also derived from copper. The company operates a number of mines, with the most well known mine being the Telfer mine located in WA. Other Newcrest Mining projects include the Cadia gold and copper mine and the Ridgeway project, both located in New South Wales.
Investment Opinion
NCM’s share price has performed exceptionally well over the past year during volatile market conditions to reward shareholders with a share price increase in excess of 78%. The company benefited largely from an increase in the price of gold, while also increasing gold production by 18%. In volatile market conditions, with a weak US dollar and low interest rates in the United States and Europe, the outlook for gold prices remains positive.
Therefore, as a multi mine gold producer, NCM is in a strong position to benefit from continued strength in the gold price. This was evident by the company’s recent interim FY08 result where it reported a 183% increase in half yearly profits. With production guidance of 1.81 to 1.89 million ounces for FY08, NCM is forecast to report a 122% increase in EPS for FY08, which may bode well for further share price appreciation.
Financials
NCM’s financial health has steadily improved for the past four straight periods. This improvement has been driven by a reduction in gearing as well as increased strength in the company’s earnings and cash flow management. During the first half of FY08, NCM reported a 183% increase in half yearly profits. As a result the company’s ROA increased substantially to 12.32% (up from 4.35% in the previous corresponding period) while EPS grew by 194.37% to 52.47 cents.
Valuation
NCM last closed at $38.00 per share at a PE ratio of 44.38 times, a substantial premium to the Materials sector industry group average of 14.26 times. This indicates NCM is potentially fully valued at its current price. However, when NCM’s strong EPS growth rate is considered, a Price Earnings Growth (PEG) ratio of just 0.23 indicates that this premium may be justified by the potential for further share price appreciation.
Outlook
The outlook for NCM is positive. At the company’s half year FY08 results presentation, NCM reaffirmed their production guidance of 1.81 to 1.89 million ounces of gold as well as a production guidance of 86.5 to 90 thousand tonnes of copper. Also, the company’s Cadia mine is expected to make an improved revenue contribution in the current period. According to consensus analyst forecasts, NCM is expected to report an EPS figure of 113.40 cents for FY08. This would see the company trade at a PE ratio of 33.51 times and a PEG of 0.27, an undervalued position.
What is the Earnings per Share (EPS) growth figure?
A company’s Earnings per Share (EPS) figure is calculated by dividing total earnings by the total number of shares on issue. The EPS growth figure is a comparison between two corresponding periods expressed as a percentage.
What is the importance of the EPS figure?
Once it has been established that a company is in a sound position of financial health, it is important to assess the ability of the company’s management team to grow the business, and most importantly deliver strong returns to shareholders.
While a company’s Return on Assets (ROA) is a strong correlating factor to share price appreciation, we also look for an EPS growth figure of greater than 8% p.a. to demonstrate that earnings as a result of quality performance are being passed onto shareholders.
In our example above, NCM’s management team has performed well achieving ROA of 12, above the benchmark criteria.
Most importantly, in the past year NCM shareholders have enjoyed significant upside appreciation in share price which is reflected by EPS growth of 194.37% for the 12 months to 31 December 2007, well above the benchmark criteria of at least 8% p.a.
Going forward, with consensus analyst forecasts predicting a full year FY08 EPS figure of 113.40 cents for NCM, this would equate to a 122.48% increase on the previous corresponding period. Should NCM meet their projected production figures, and gold and copper prices remain stable, NCM investors may be in for another period of strong share price appreciation.
Tim Lincoln is Managing Director of Lincoln, Australia's premier fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Click here to register to receive Star Gazing – Lincoln's Fortnightly Stock Tip.
More articles from this edition of CompareShares:
Rate rise: When and where will the rate hikes stop
Resident Trader: The greater fool theory of trading shares
Stocks: Good conditions for Newcrest Mining bodes well for its share price
Investing: Top places to stash your cash
Forex: Fundamental reasons for a record high Aussie dollar against the greenback
Expert Panel (CFDs): Capitalising on price movements in reporting season
Housing: A dozen reasons for housing stress
Rate rise: RBA on inflation 'red alert'
Important information:
Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 27 February 2008.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.
You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a managed fund, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.
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