Why You Need To Look At This Factor Before Buying Franco-Nevada Corporation (TSX:FNV)
If you are a shareholder in Franco-Nevada Corporation’s (TSX:FNV), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. FNV is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
Check out our latest analysis for Franco-Nevada
What is FNV’s market risk?
Franco-Nevada’s five-year beta of 1.13 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, FNV may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does FNV's size and industry impact its risk?
A market capitalisation of USD $18.10B puts FNV in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. But, FNV’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a low beta for the large-cap nature of FNV but a higher beta for the metals and mining industry. This is an interesting conclusion, since its size suggests FNV should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How FNV's assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine FNV’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. FNV's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of FNV indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, FNV’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from higher returns from FNV during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand.
Are you a potential investor? Before you buy FNV, you should factor how your portfolio currently moves with the wider market, and where we are in the economic cycle. This stock could be an outperformer during times of growth, and it may be worth taking a deeper dive into the fundamentals to crystalize your thoughts on FNV.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Franco-Nevada for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Franco-Nevada anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
