Value-focused investors are constantly searching for stocks priced below their intrinsic value. One such stock that deserves attention is Newmont Corp (NEM, Financial). Currently priced at $38.97, the stock registered a gain of 3.98% in a day and a 3-month decrease of 6.45%. According to its GF Value, the fair valuation of the stock stands at $71.63.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our unique method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded. This is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
The GF Value Line is believed to be the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Newmont (NEM, Financial) should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.36. These indicators suggest that Newmont, despite its apparent undervaluation, might be a potential value trap, highlighting the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
The Altman Z-score is a financial model invented by New York University Professor Edward I. Altman in 1968. It predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
A Snapshot of Newmont Corp (NEM, Financial)
As the world's largest gold miner, Newmont produced about 6 million attributable ounces of gold in 2022, accounting for about 5% of global mined output. Additionally, the company sold 1.3 million attributable gold equivalent ounces from the sale of byproducts, including copper, silver, zinc, and lead in 2022. With a portfolio that includes 12 wholly owned mines and interests in two joint ventures in the Americas, Africa, and Australia, Newmont had about two decades of gold reserves along with significant byproduct reserves at the end of 2022.
Breaking Down Newmont's Low Altman Z-Score
A dissection of Newmont's Altman Z-score reveals that its financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Newmont's historical data, 2021: 0.09; 2022: 0.07; 2023: 0.02, we observe a declining trend in this ratio. This downward movement indicates Newmont's diminishing ability to reinvest in its business or effectively manage its debt, thereby negatively impacting its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Newmont's EBIT to Total Assets ratio from historical data (2021: 0.07; 2022: 0.03; 2023: 0.00) indicates a descending trend. This reduction suggests that Newmont might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Is Newmont (NEM, Financial) a Value Trap?
In conclusion, despite its seemingly attractive valuation, the potential risks associated with Newmont (NEM) may outweigh the potential rewards. The company's low Altman Z-score and declining ratios suggest possible financial distress, making it a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
