Revenue estimates are too conservative  

Management was very conservative in its 2017 and 2018 revenue-growth estimates, where revenue growth was around 40% versus management’s 20% guidance. Based on this, I believe 40% revenue growth in 2020 could be highly probable based on management’s recent initiatives.

Canada Goose is slowly shifting its channels of distribution from wholesale to direct to consumer (DTC). DTC is a higher-margin segment, as it saves the higher mark-ups added by the middlemen and protects brand image. Selling directly to customers not only allows for a better relationship but also takes advantage of impulse buys, while gaining access to customer shopping data.

GOOS is expected to launch eight new retail stores in Italy, the U.S., Canada, China, and one brand-new digital concept store in Toronto. The firm is also releasing stores with a “cold room,” which improves customer shopping experience by allowing them to try the products in the environment for which they are built.

The company had produced 47% of its down-filled jackets in-house instead of outsourcing them to third-party manufacturers. Canada Goose also opened eight manufacturing facilities recently. In-house production not only adds value through increased profits and productivity but also improves scale production, efficiency, flexibility, quality, and product categories. This shows an improvisation of vertical integration, which should accompany an increase in revenue.

Lastly, leveraging its well-known brand and product quality, GOOS has significant pricing power, which is evident with its jackets ranging between $400 and $1,600, while the company’s products go on sale very occasionally. Also, collaboration with actors should further improve its brand image and increase pricing power.

Risk/reward scenario

Bull case: Assuming a 2020 EBIT (earnings before interest and taxes) of $290.7 million, which is essentially a 40% increase in the revenue-growth rate, and a 35 times EV (enterprise value)/EBIT multiple ) that is well below its 2018 multiple of 45 times EV/EBITDA, you would get a total enterprise value (TEV) of $9.15 billion (35 times $290.7 million). By simply adding back current cash value of $88.6 to TEV, we get a market value of $9.24 billion. And dividing this with expected diluted shares outstanding of 112.4 million, we arrive at a price target of $82. Ultimately, this is 54% upside from the current price.

Base case: Using the same concept, this time a 20% revenue-growth rate (management’s base-case scenario) gives us an EBIT of $227.3 million. The current 30 times EV/EBIT multiple attains a TEV of $6.82 billion. Adding cash back (for market value) and dividing shares outstanding (112.4 million) would give us a $62 price target, which is 20% upside from the current price.

Bear Case: Just like the above-mentioned scenarios, assuming a 10% revenue growth will produce an EBIT of $205.2 million. With a 25 times EV/EBIT multiple, adding cash back and dividing it with shares outstanding would leave the share price at $46, which is essentially a 12% decline.

This draconian scenario assumes a slowdown in Canadian economy due to oil price volatility, China’s consumer spending and more softness in the U.S. economy could affect the company’s revenue. According to Fool.ca writer David Jagielski, there are still some risks around Chinese boycott of Canada Goose jackets following the arrest of Huawei’s CFO. These issues could affect the firm’s bottom-line revenue.

Overall, although there are some macro risks that are going to affect revenue in the near term, I believe Canada Goose is a high-growth company with a lot of untapped market across China, the U.S., and Western Europe. Buying at the current price gives long-term investors a great risk/reward scenario and a high margin of safety; it is way below its intrinsic value.

The post Canada Goose (TSX:GOOS): Recent Drop Creates a Great Buying Opportunity for Long-Term Investors appeared first on The Motley Fool Canada.

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Better estimates for Aurora Gold Mine

Guyana’s Aurora gold mine has 4.9 million ounces of gold. After some inaccurate estimates that led to overinflated reserves, management has taken some drastic measures, such as replacement of the key executive team, appointment of a non-executive chairman, and re-focused on high-margin/high-return exploration opportunities.

Although the management doesn’t have a strong track record of forecasting reliable and accurate models, the current team had released an in-depth model with more reliable production and costs forecasts.

In addition, Aurora is the highest-grade gold mine in the industry, extracting around 2.6 grams per tonne (g/per T). This is well above other close competitors’ goldmines like Kinross Gold, Tahoe Resources and Yamana Gold, which can only produce around 0.7g/per T.

Expected to improve margins

Based on the management’s forward guidance for 2019, revenues and margins should stabilize and improve going forward.

Guyana Goldfields is expected to produce around 150k (mid-point) ounces of gold by the end of 2019. Considering that gold prices are on an upward trend, I believe the average price will be around $1,320 per ounce until the end of 2019.

Using these conservative estimates, we should arrive with a forecasted 2019 revenue of $198 million. In regards to operating margins, I took the midpoint of all-in sustaining costs (AISCs) of $1,200 per ounce.

Essentially, AISCs are an accurate measure for mining companies, as they take into account “the pertinent costs of mine maintenance (on-site mine and administrative costs, royalties and production taxes, byproduct credits, permitting costs, smelting, refining, and transport) as well as behind-the-scenes costs that aren’t often associated with on-site mining but still factor into overall expenses,” according to Fool.com writer Sean Williams.

After deducting AISCs, operating margins or EBIT should be at $18 million and EBITDA around $48 million. This gives us an EBITDA margin of 25%, in line with 2018 EBITDA margin.

To arrive at the 2019 levered free cash flow (FCF) on an adjusted basis, I have deducted interest expense, taxes, and maintenance capex (capex to keep the firm competitive), as well as added the change in net working capital of $2,000 (assuming it’s positive going forward) and depreciation and amortization. I believe the interest expense for 2019 would be close to zero, as the firm paid off the remaining $35 million long-term debt, virtually making it debt-free, at least for 2019.

Based on these assumptions, the firm should generate approximately 20% FCF yield in 2019 — better than its competitors. I believe margins are expected to improve further in 2020 and beyond, as the management successfully executes its cost-reduction measures.

As you can see from the 2019 forecasted comparables valuation table above, the stock looks very cheap relative to its closest competitors like Wesdom Gold and Torex Gold, on an EV/EBITDA and EV/EBIT basis, along with having the highest FCF yield on an adjusted/normalized basis.

Even better, the company can self-fund its capital expenditures for future growth using its strong and adequate cash flow and doesn’t need to issue any large amounts of long-term debt. The firm’s high FCF yield and low leverage should make it less risky in contrast with its industry peers.

In conclusion, although there are some key risks in regards to management’s history of overinflated forecasts and the nature of the mining business in general (commodity price risk, cost overruns, delays, etc.), I believe these risks are overblown and the current price ($0.93) should provide investors with an excellent risk/reward scenario and a potential to double their investment.

The post Guyana Goldfields (TSX:GUY): a Small-Cap Gold Miner With +50% Upside Potential appeared first on The Motley Fool Canada.

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