Several companies have been upgrading their operating activities in recent years, as shown by a substantial increase in the allocation of funds to the purchase of fixed assets such as property, plant and equipment. This could mean the managers of these companies expect higher demand for the goods and services they produce, which would ideally correspond to higher revenue.
Wall Street sell-side analysts are also optimistic about these three stocks, as they have issued positive recommendation ratings for each of them.
NIO
The first company is NIO Inc. (NIO, Financial), a Shanghai-based manufacturer of medium to large-sized electric vehicles in China. The company sold more than 91,000 units, or nearly 3% of China's new-energy passenger vehicle market last year.
Purchases of property, plant and equipment by NIO have grown by approximately 83.23% per year over the past five years, from $168.95 million for the year ended December 2017 to $640.38 million for the year ended December 2021.
Morningstar analysts estimate total sales will grow 46.22% year over year to $8.32 billion through 2022. After that, they are projected to grow 82.1% year over year to $15.15 billion by 2023 and 42% year over year to $21.50 billion by 2024.
The stock closed at $20.90 per share on Monday for a market capitalization of $34.91 billion. The share price is down 40.11% over the past year, yielding a price-book ratio of 7.26 versus the industry median of 1.44.
Based on the company's price-to-book ratio, the stock looks expensive.
Furthermore, the following relationship, which compares NIO's weighted average cost of capital of 13.83% to its return on invested capital of -30.52%, shows the company is not creating value for its shareholders as it grows. However, if sales increase as expected after massive investments in fixed assets and, ideally, earnings also improve significantly, the WACC-ROIC relationship should shift in favor of value creation, which could give the share price a strong boost.
The Altman Z-Score of 2.89 indicates a probability that the company could go bankrupt within a few years, though the risk is low because the ratio borders on the edge of the safe zone. If profitability improves, as shareholders are hoping and analysts are forecasting, the Altman Z-Score should improve as well.
On Wall Street, sell-side analysts have placed an average price target of $29.41 per share for the stock, while the median recommendation rating is buy.
Verizon Communications
The second stock is Verizon Communications Inc. (VZ, Financial), a New York-based telecommunications company. At the end of 2021, the company’s consumer segment was comprised of 115 million retail wireless subscriptions, approximately 7 million wired broadband subscriptions and approximately 4 million fiber optic service video subscriptions. The company's portfolio also includes the business segment with approximately 27 million wireless post-paid retail lines and approximately 477,000 wired broadband lines.
Purchases of property, plant and equipment by Verizon Communications have increased at a compound annual growth rate of approximately 57.54% over the past five years, from $17.83 billion for the year ended December 2017 to $67.88 billion for the year ended December 2021.
Morningstar analysts estimate total revenue will grow by 1.91% year over year to $136.162 billion through 2022, by 1.73% to $138.513 billion through 2023 and by 1.84% to $141.065 billion in 2024.
The stock closed at $41.24 per share on Monday for a market capitalization of $173.20 billion following a 23.7% drop over the past year. The price-book ratio is 2.01 versus the industry median of 1.86.
The price-book ratio may suggest the stock is not so expensive. In addition, the company appears to be creating value for its shareholders, as evidenced by the WACC of 3.63% compared to its ROIC of 7.11%.
The Altman Z-Score should actually be much better as 1.25 indicates Verizon Communications is in distress with a significant risk of near-term bankruptcy. However, this figure should be viewed with caution as the operation is very profitable as evidenced by a GuruFocus profitability rating of 7 out of 10. Even with high levels of debt, the financial situation seems solid thanks to operating income that more than adequately offsets the interest expense.
On Wall Street, analysts have set an average price target of $50.75 per share for the stock while issuing a median hold recommendation rating.
Coeur Mining
The third stock is Coeur Mining Inc. (CDE, Financial), a Chicago-based company that explores gold, silver, zinc and lead properties with metal interests totaling approximately 215,200 acres spanning northern Mexico, north-western and southern Nevada, Alaska, western South Dakota and northern British Columbia in Canada.
However, the portion of the 35,000-acre gold deposit Coeur Mining owns in southern Nevada, valued at $200 million, will be sold to AngloGold Ashanti Ltd. (AU, Financial) sometime in the final quarter of this year. But the money will be reallocated to mineral projects that offer the company the best growth prospects and are the most important in its portfolio.
In the past year through the second quarter of 2022, the miner produced 335,210 ounces of gold and 10.1 million ounces of silver.
Coeur Mining’s purchases of property, plant and equipment have grown at a compound annual rate of about 46.34% over the past five years, from $136.73 million for full-year 2017 to $309.78 million for full-year 2021.
Morningstar analysts estimate total revenue this year will decline slightly by 4% year over year to $792.9 million. After that, they are projected to recover, growing 3.3% year over year to $819.10 million in 2023 and another 18% year over year to $966.30 million in 2024.
Shares were trading at $3.35 at close on Monday for a market capitalization of $940.91 million following a 45.62% drop that happened over the past year. The price-book ratio is 1.10 versus the industry median of 1.64.
The price-book ratio may suggest the stock is not expensive.
Coeur Mining's growth does not appear to be progressing smoothly, as evidenced by the WACC of 11.34% compared to the ROIC of 0.41%, suggesting the company is generating returns that do not match its cost of capital. It will destroy value going forward if the situation does not improve significantly.
In addition, the Altman Z-score of -1.36 indicates a significant probability of bankruptcy occurring in the near future. For now, however, the company can bear the burden of the various costs, including the interest expense accrued on the total debt of $572.4 million as of June 30, 2020. In fact, the trailing 12-month operating income of $21 million was 1.3 times the interest expense of $16.2 million.
It is a risky bet, but it has strong upside potential after huge past capital expenditures, which the company plans to continue with $200 million in proceeds from the sale of some gold properties.
Now shareholders are hoping the price of the precious metal will play its part. The uncertain conditions resulting from the war in Ukraine and monetary policy with unforeseen consequences for the economy, which should stimulate demand for gold and silver as hedging instruments, seem propitious.
Sell-side analysts on Wall Street have set an average price target of approximately $4.59 per share while issuing a median hold recommendation rating for this stock.
