Earnings

A Side-by-side Analysis of Barrick Gold Corporation (ABX) and Gold Fields Limited (GFI)

Barrick Gold Corporation (NYSE:ABX) and Gold Fields Limited (NYSE:GFI) are the two most active stocks in the Gold industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ABX to grow earnings at a -11.35% annual rate over the next 5 years. Comparatively, GFI is expected to grow at a 18.30% annual rate. All else equal, GFI’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. ABX’s ROI is 9.50% while GFI has a ROI of 8.50%. The interpretation is that ABX’s business generates a higher return on investment than GFI’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. ABX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, GFI’s free cash flow per share was +2.28. On a percent-of-sales basis, ABX’s free cash flow was 0.14% while GFI converted 68.06% of its revenues into cash flow. This means that, for a given level of sales, GFI is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. ABX has a current ratio of 3.60 compared to 1.20 for GFI. This means that ABX can more easily cover its most immediate liabilities over the next twelve months. ABX’s debt-to-equity ratio is 0.77 versus a D/E of 0.56 for GFI. ABX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABX trades at a forward P/E of 22.20, a P/B of 2.07, and a P/S of 2.28, compared to a forward P/E of 15.09, a P/B of 1.03, and a P/S of 1.22 for GFI. ABX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ABX is currently priced at a -14.68% to its one-year price target of $20.09. Comparatively, GFI is 25.38% relative to its price target of $3.31. This suggests that ABX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for ABX and 3.30 for GFI, which implies that analysts are more bullish on the outlook for GFI.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ABX has a beta of -0.27 and GFI’s beta is -1.00. GFI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. ABX has a short ratio of 1.06 compared to a short interest of 1.15 for GFI. This implies that the market is currently less bearish on the outlook for ABX.

Summary

Gold Fields Limited (NYSE:GFI) beats Barrick Gold Corporation (NYSE:ABX) on a total of 8 of the 13 factors compared between the two stocks. GFI generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GFI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BLDR has better sentiment signals based on short interest.

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