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Franco-Nevada (FNV) Up 26% YTD: What's Driving the Rally?

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Franco-Nevada Corporation (FNV - Free Report) is well poised to gain from rally in gold prices, robust portfolio of streaming and royalty agreements, debt-free balance sheet, and expected savings from its prudent cost management. The company’s shares have gained 26.3% year to date, compared with the industry’s rally of 16.2%. Notably, the S&P 500 rallied 12.9% in the said period.

The solid performance can be attributed to an impressive earnings surprise trend. Franco-Nevada’s earnings beat estimates in each of the trailing four quarters, the average surprise being 16.5%. Both the top and bottom lines have also improved in the past seven quarters. The trend is expected to continue in the near term, supported by rally in gold prices and the company’s cost control efforts amid the COVID-19 crisis.

Franco-Nevada has a market capitalization of $24.9 billion. Average volume of shares traded in the past three months was 711.7k. It has a long-term estimated earnings per share growth rate of 4%.

Let’s delve deeper and analyze the factors driving the stock.

Driving Factors

A major portion of the company’s revenues is sourced from gold compared to other metals. The yellow metal has gained 19% so far this year primarily due to the coronavirus pandemic. With the pandemic showing no signs of abating any time soon, the ongoing uncertainty regarding its impact on the global economy will continue to trigger safe haven demand for gold, thus fueling its prices. Silver prices have also gained 30% year to date on the back of pickup in industrial activity. So far this year, palladium prices have gone up 23% and are anticipated to remain high aided by demand and supply imbalance. The improvement in metal prices is likely to get reflected in Franco-Nevada’s top line performance in the forthcoming quarters.

Franco-Nevada sold a record 516,438 Gold Equivalent Ounces (GEOs) in 2019. Over the five-year period, its GEOs sold have increased over 40%. The largest increase in GEO sold is from gold assets, of which, Cobre Panama is the largest component. The company expects attributable royalty and stream sales from its mining assets to be near the high end of its range of 475,000 GEOs to 505,000 GEOs in 2020.

One of the inherent strengths of its business model is the diversification of portfolio. Two of its assets, Candelaria and Antapaccay, accounted for 12% of its revenues individually for 2019 followed by Cobre Panama with a contribution of 8% — taking the total to 32%. Further, no legal entity accounts for more than 50% of its revenues. It has operator diversification as well.

Also, given its sustained focus on cost management, Franco-Nevada continues to generate high margins. Notably, the cash costs per GEO (Cost of sales, less depletion and oil and gas costs, divided by gold equivalent ounces) was $266 in 2019, seeing a CAGR of 3% during the 2015-2019 period. During this time, its margins witnessed a CAGR of 5%. Hence, the combination of high gold prices and low costs will bolster margins.

Franco-Nevada is financially strong and has a debt-free balance sheet. As of Sep 30, 2020, the company had working capital of $559.2 million, including cash and cash equivalents of $466.8 million, marketable securities of $146.0 million, and credit facilities of $1.1 billion. Hence, the company is well positioned to make further investments to grow its diversified portfolio of assets despite the troubled times.

Positive Growth Projections

Earnings estimates for 2020 and 2021 have moved north by 10% and 5%, respectively, in the past 90 days. The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $2.52 per share, suggesting year-over-year growth of 38.5%. The same for 2021 stands at $3.05, indicating year-over-year improvement of 21.2%.

Zacks Rank & Stocks to Consider

Franco-Nevada currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Bunge Limited (BG - Free Report) , Clearwater Paper Corporation (CLW - Free Report) and Rayonier Advanced Materials Inc. (RYAM - Free Report) . While Bunge sports a Zacks Rank #1 (Strong Buy), Clearwater Paper and Rayonier Advanced Materials carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bunge has a projected earnings growth rate of 43% for fiscal 2020. The stock has gained 7% year to date.

Clearwater Paper has an expected earnings growth rate of 1961% for the current year. Year to date, the company’s shares have appreciated 67%.

Rayonier Advanced Materials has an estimated earnings growth rate of 92% for fiscal 2020. Its shares have surged 71% year to date.

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