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Franco-Nevada Shares Up 32% YTD: What's Driving the Rally?

Zacks Equity Research

Shares of Franco-Nevada Corporation FNV have rallied 32% year to date compared with the  industry’s growth of 24.8%. Meanwhile, the S&P 500 has declined 2.7%.

Franco-Nevada has a market capitalization of $26 billion. Average volume of shares traded in the past three months was 1.05 million. It has a long-term estimated earnings per share growth rate of 4%.

The company has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 13.9%.

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

Driving Factors

Franco-Nevada Corporation reported better-than-expected first-quarter earnings. Adjusted earnings came in at 58 cents per share, up 65.7% from the prior-year quarter. Revenues were $241 million in the reported quarter, reflecting a year-over-year improvement of 34%. The company beat the Zacks Consensus Estimate on both counts. In the reported quarter, 89% of revenues were sourced from gold and gold equivalents (69.4% gold, 9.2% silver, 9.4% platinum group metals and 1% from other mining assets) while the balance 11% was generated from energy (oil, gas and natural gas liquids).

Given that major portion of the company’s revenues is sourced from gold compared to other metals, the rally in gold prices this year bodes well for its top-line performance. Gold has gained 17% so far this year primarily owing to the coronavirus pandemic. Notably, the gold prices have been gaining primarily on the pandemic’s devastating impact on the global economy and the unprecedented monetary and fiscal stimulus in response to the same. The civil unrest in the United States, geopolitical tensions and the U.S.-China trade spat have also significantly contributed to the price movement so far. With the pandemic showing no signs of relenting any time soon, the ongoing uncertainty regarding its impact on the global economy will continue to trigger safe haven demand for the yellow metal, thus fueling gold prices.  

Franco-Nevada's revenue is generated from various forms of agreements, ranging from net smelter return royalties (“NSR”), streams, net profits interests, net royalty interests, working interests and other types of arrangements. The company does not operate mines, develop projects or conduct exploration. Franco-Nevada's business model is focused on managing and growing its portfolio of royalties and streams. Some of its mining operators have been facing the unfavorable impact of the coronavirus outbreak, which includes temporary suspension of operations and production curtailment. Notably, the company’s operator diversification will help negate the overall impact on revenues.

Also, given its continued 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 at $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 Mar 31, 2020, the company had available liquidity of $1.5 billion. Thus, the company is well-positioned to make further investments to grow its diversified portfolio of assets despite the troubled times. Notably, while other companies are suspending dividends or refraining from dividend hikes owing to the coronavirus-induced crisis, Franco-Nevada announced that its board of directors has declared a 4% hike in dividends.

Positive Growth Projection

The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $2.17 per share, suggesting year-over-year growth of 19.2%. The same for 2021 stands at $2.69, indicating year-over-year growth of 23.8%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are Galiano Gold Inc. GAU, Clearwater Paper Corporation CLW and The Scotts MiracleGro Company SMG. All of these stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Galiano Gold has a projected earnings growth rate of 1167% for the current year. The company’s shares have gained 19% so far this year.

Clearwater Paper has an estimated earnings growth rate of 1043% for fiscal 2020. Its shares have appreciated 68% year to date.

Scotts MiracleGro has an expected earnings growth rate of 30% for fiscal 2020. So far this year, the company’s shares have surged 27%.

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