The Motley Fool

Why Barrick Gold (TSX:ABX) Is a Screaming Buy Despite Valuation Concerns

Image source: Getty Images.

Gold has rallied almost 27%, while top miner stock Barrick Gold (TSX:ABX)(NYSE:GOLD) is up 60% this year. While the stock is indeed expensive, its second-quarter earnings underline the growth path.

Let’s see what’s next for the world’s second-biggest gold miner.

Barrick Gold: Q2 Earnings

Driven by rallying gold prices, miners were expected to report fairly high quarterly earnings. Barrick Gold’s Q2 numbers fall very much on those lines.

Barrick Gold reported revenues of over $3 billion, an increase of 48% year over year. Its net income more than doubled to $415 million compared to the same quarter last year.

Barrick Gold increased its per-share dividends by 14% to $0.08, doubling from last year. The stock soared after releasing its Q2 earnings on August 10 but later closed at $38.3 for the day.

Apart from the higher earnings numbers, there is a lot more to focus on Barrick’s Q2 report.

Positive outlook

Barrick Gold has been working on improving its balance sheet for the past few years. It has sold interests in several unprofitable mines recently and paid back the debt.

At the end of Q2 2020, the miner had net debt of $1.4 billion. It aims to reduce the company’s net debt to zero this year. Mining is a capital-intensive business, and Barrick’s lighter balance sheet is a real plus for investors.

Its production for the quarter fell 14% compared to the same period last year. However, its full-year production target remains intact at 4.8 million ounces.

The production sharing issue with the Papua New Guinea government related to Porgera mine continues to linger. That might not matter much, as the mine forms a small share in overall production.

Notably, analysts expect 25% higher revenues for the second half of 2020 compared to the same period last year. Rallying gold prices have substantially boosted miner’s earnings this year, and the trend is expected to continue.

Barrick is one of the top TSX stocks to play the gold rally. Its operational efficiency, unique set of assets, and scale notably differentiate it from peers.

Barrick Gold: Valuation

Gold started to show some green shoots since mid-2018. The metal has rallied 70% since then, while the miner has surged a massive 185% in this period.

Investors should note that Barrick is currently trading at a forward price-to-earnings multiple of 43. The stock looks notably expensive, as the multiple is higher than its average historical valuation and that of peers.

However, the underlying growth story very well justifies its premium valuation. Barrick Gold is showing all those characteristics of a growth stock with its revenues and earnings growing at a stellar pace.

The gold rally will play a major role in keeping miner stocks higher. That’s the most likely scenario with near-zero interest rates and volatile equities.

As an overvalued stock, Barrick might see an exaggerated impact of the potential broad market weakness or an interim pause in the gold rally. Conservative investors could then jump in to get a safer deal.

Looking for more growth stocks?

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.