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Has Newmont Mining Become the Perfect Stock?

By Dan Caplinger - Apr 2, 2013 at 9:53AM

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The mining company has fallen on hard times. Can it recover?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Newmont Mining (NEM 0.08%) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Newmont Mining.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

12.5%

Fail

 

1-year revenue growth > 12%

(4.7%)

Fail

Margins

Gross margin > 35%

56.4%

Pass

 

Net margin > 15%

18.3%

Pass

Balance sheet

Debt to equity < 50%

37.2%

Pass

 

Current ratio > 1.3

1.89

Pass

Opportunities

Return on equity > 15%

13.4%

Fail

Valuation

Normalized P/E < 20

12.37

Pass

Dividends

Current yield > 2%

4.1%

Pass

 

5-year dividend growth > 10%

28.5%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Newmont Mining last year, the company hasn't been able to regain the point it lost from 2011 to 2012. The stock has gotten hammered, dropping 20% over the past year.

Newmont has had to deal with two major forces working against it lately. Gold prices have been fairly weak, with the SPDR Gold ETF (GLD -0.63%) having lost 5% of its value in the past 12 months as it has closely tracked the falling price of gold bullion. Even worse, rising production costs have led to considerable concern among investors about Newmont's ability to keep its profit margins up.

Of course, Newmont is far from the only mining company to face cost pressures. In its most-recent quarterly report, fellow mining giant Barrick Gold (GOLD -0.24%) cited attempts to contain costs as well as environmental concerns as reasons for disappointing results. But one big issue facing Newmont in particular is a lack of excitement about its growth prospects. Some might point to its size as limiting opportunities for meaningful growth, but rival Goldcorp (GG) has put together an impressive pipeline of prospect properties as part of its five-year growth plan. Goldcorp's ability to keep costs down has also given it a big advantage over Newmont's higher-cost production.

One area where Newmont has rewarded investors is with its dividend, which has more than tripled in the past three years. But with gold prices stuck in neutral, Newmont hasn't been able to push its payout higher since late 2011, and continuing weakness could lead to dividend cuts at some future point.

For Newmont to improve, it needs to focus on getting its production volumes up and its costs down. Otherwise, competitors will remain better positioned to take advantage of future gold-price increases if they come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Newmont Mining to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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Stocks Mentioned

Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
NEM
$65.50 (0.08%) $0.05
SPDR Gold Trust Stock Quote
SPDR Gold Trust
GLD
$169.33 (-0.63%) $-1.07
Goldcorp Inc. Stock Quote
Goldcorp Inc.
GG
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$20.47 (-0.24%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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