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RGLD Stock Study (6-24-24)

Posted by on August 6, 2024 at 07:07 | Last modified: June 25, 2024 09:48

I recently studied Royal Gold Inc. (RGLD) with a closing price of $124.85.

M* writes:

     > Royal Gold Inc enquires and manages precious metal royalties and
     > streams, with a focus on gold. The company operates by purchasing
     > a percentage of the metal produced from a mineral property for
     > an initial payment, without assuming responsibility of mining
     > operations. Similarly, precious metal streams are purchase
     > agreements with mine operators providing the right to purchase
     > all or a portion of one or more metals produced from a mine, in
     > exchange for an upfront deposit payment. Generally Royal Gold
     > does not conduct any work on the properties in which it holds
     > royalty and streaming assets. The company owns a portfolio of
     > producing, development, evaluation, and exploration royalties
     > and streams, and the majority of group revenue is generated
     > from Canada, Mexico, Chile, and the United States.

Over the past decade, this small-size company has grown sales and EPS at annualized rates of 10.7% and 20.8%, respectively [excluding for the entire study non-recurrent-loss years ’16 and ’18 (although Value Line does not report any exclusion for the latter nor do they report the $1.73/share GAAP loss seen on the BI website and CFRA report)]. Lines are mostly up and parallel with sales declines in ’19 and ’22 and EPS declines in ’19 and ’22.

Over the past decade, PTPM leads peer averages and matches the industry while increasing from 35.0% (’14) to 46.6% (’23) with a last-5-year mean of 42.1%. ROE leads peer and industry averages while increasing from 2.7% (’14) to 8.4% (’23) with a last-5-year mean of 8.6%. Debt-to-Capital is lower than peer and industry averages while falling from 11.7% (’14) to 7.8% (’23) with a last-5-year mean of 9.2%.

Quick Ratio is 2.3 and Interest Coverage is 11.5. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

I am forecasting toward the lower end of the range at 3.0% per year.

With regard to EPS growth:

My 4.0% per year forecast is at the bottom of the long-term estimate range (mean of four: 18.0%). Initial value is ’23 EPS of $3.63/share rather than 2024 Q1 EPS of $3.39 (annualized).

My Forecast High P/E is 37.0. Over the past decade, high P/E falls from 80.1 (’14) to 40.7 (’23) with a last-5-year mean of 46.3 and a last-5-year-mean average P/E of 37.3. I am near the bottom of the range [only ’21 (32.1) is less].

My Forecast Low P/E is 24.0. Over the past decade, low P/E falls from 42.1 (’14) to 28.0 (’23) with a last-5-year mean of 28.3. I am forecasting near the bottom of the range [’20 (19.7), ’21 (21.6), and ’22 (23.3) are lower].

My Low Stock Price Forecast (LSPF) of $87.10 is default based on initial value given above. This is 30.2% less than the previous closing price and 13.3% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 25.7% in ’21 to 109% in ’15 with a last-5-year mean of 43.3%. I am forecasting below the range at 25.0%.

These inputs land RGLD in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 6.2%.

PAR (using Forecast Average—not High—P/E) is lower than I seek for a small-size company at 2.4%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 10 studies (seven outliers including mine excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 11.6%, 12.0%, 37.1, 26.0, and 43.3%. I am lower across the board. Value Line’s projected average annual P/E of 31.0 is lower than MS (31.6) and higher than mine (30.5).

MS high / low EPS are $6.40 / $3.38 versus my $4.42 / $3.63 (per share). My high EPS is less due to a lower growth rate. Value Line soars above both at $7.20/share.

MS LSPF of $86.60 implies a Forecast Low P/E of 25.6: close to the above-stated 26.0. MS LSPF is 1.5% less than the default $3.38/share * 26.0 = $87.88 thereby resulting in more conservative zoning. MS LSPF is also 0.6% less than mine.

MOS in this study is solid. My TAR (over 15.0% preferred) is much less than the 16.2% from MS. Although this carries decreased impact due to the small MS sample size, I use a low growth rate to match YF’s extremely low estimate.

Since I like to forecast below the range, without the YF estimate my forecast EPS growth would be a whopping 11 percentage points higher. That would put the stock in the BUY zone with an U/D of 3.6 and TAR >15.0%. If YF remains unchanged next time while others are noticeably different, I may consider excluding it or at least splitting the difference.

With regard to valuation, PEG is 1.1 and 8.9 per Zacks and my projected P/E, respectively: discrepancy proportional to growth rates. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 0.99.

U/D has RGLD a BUY under $106/share. The stock needs to approach $82 in order to meet the BI TAR criterion given a forecast high price ~$163.

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