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Profit From a Rising Gold Price

- By Alberto Abaterusso

As the U.S. Federal Reserve has promised to be patient with increases in the federal funds rate going forward, commodities, which have been under pressure, have found some relief.

As one of the top commodies affected by interest rates, gold is currently uptrending on the London Bullion market. One troy ounce jumped 3.3% to $1,310 on Feb. 7 from the average of $1,268.49 for 2018.


Investors should take advantage of this shift by investing directly in the commodity or through gold futures. Another option is buying shares of public, gold-backed exchange-traded funds. Since the market capitalizations of these funds are sensitive to the price of gold, investors' portfolios can benefit from the positive trend.

A very active gold-backed ETF is the SPDR Gold Shares (GLD). Driven by uncertainty that is currently ruling the financial markets, the fund grew nearly 5% in January to approximately 824 tons of gold assets under management. Shares of the ETF gained nearly 3%, outperforming the Comex by 3,150 basis points in January.

Alternatively, investors can buy shares of publicly traded companies that are involved with the metal, including miners and royalty and streaming companies.

Among the gold-focused royalty and streaming companies, investors may want to consider gaining exposure to the commodity through Franco-Nevada Corp. (FNV). The share price of the Canadian company has gained 6.83% so far this year, outperforming the highly active SPDR Gold Shares by nearly 5% and the VanEck Vectors Gold Miners ETF (GDX) by 2.4%.

What is helping this player to outperform the industry? The profitability of its business is definitely making a difference here. Franco-Nevada has dropped 60% of its total revenues to the profits line as earnings before interest, taxes, depreciation and amortization.

Franco-Nevada is a leader in the industry and is profiting from a very diversified portfolio of royalties and streams located in the Americas, Africa and Australia. The portfolio of mineral interests is very heterogeneous from a business standpoint, too, as gold is not the only commodity the company is trading. The company also has mineral interests in silver, platinum group metals and oil and gas properties.

Over the past decade through 2017, the company has steadily grown annual production to 497,745 ounces of equivalent gold, annual revenues to $675 million and annual adjusted earnings to about $1.15 per share. The free cash flow allocated every year for dividends and reinvestment increased to $170 million as of 2017.

For 2018, Franco-Nevada is expected to deliver a lower output of 445,000 to 450,000 ounces of gold equivalent. During the year, the bullion averaged $1,268.49 per troy ounce, up from $1,257.12 per troy ounce in 2017. Regardless, Franco-Nevada will likely surpass expectations on earnings and revenue.

Wall Street has established an overweight rating on shares of Franco-Nevada, meaning the stock is expected to outperform over the next 12 months.

The average target price of $107.92 reflects a 44% upside from the closing share price of $74.96 on Thursday, for a market capitalization of $14.09 billion.

As of Feb. 7, the share price is above the 200, 100 and 50-day simple moving average lines. The 52-week range is $58.26 to $77.92.

The 14-day relative strength indicator is 71.8, suggesting the stock is approaching overbought levels and that a correction could follow. Therefore, I would also be patient before buying shares of Franco-Nevada.

The price-book ratio is 3 compared to an industry median of 1.74, the price-sales ratio is 21.31 versus an industry median of 1.49 and the price-earnings ratio is 66.85 versus an industry median of 14.76. The enterprise value-to-revenue ratio is 21.27 compared to an industry median of 2.13. These ratios indicate the stock may be overvalued. The Peter Lynch chart also suggests the stock is overpriced.

Franco-Nevada is paying a quarterly dividend of 24 cents per share. The next payment is scheduled for March 28 to shareholders of record as of March 14. The ex-dividend date is March 13. The forward dividend yield is 1.26%, below the industry median of 3.36% and the S&P 500 Index's dividend yield of 1.99% of as of Feb. 7.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.