The precious metals royalty company caught my attention several years ago. Its business model looked like a combination of the goose that lays the golden eggs and the proverbial cash cow. Let me explain.
Unlike the typical gold mining company that shoulders all the exploration and production expenses, Royal Gold can cherry pick mining operations run by other companies who need investment capital. In return for its investment outlay Royal Gold receives precious metals royalties, precious metals streams and similar interests.
The company focuses on acquiring royalty interests from proven mines that are either in production or in development stage in exchange for royalty payments. The Denver, Colo.-based firm owns interests on 204 properties on six continents, including interests on 36 producing mines and 21 development stage projects.
Stated another way, it has all the benefits of being in the precious metals business with very few of the risks. That's why I consider it one of the safest ways to invest in the nascent bull market in gold after the brutal bear market that trashed such big name miners as Barrick Gold (ABX) .
It was that bear market culminating in late 2013 which helped Royal Gold seal more profitable deals. As the price of gold fell from $1,900 an ounce in 2011 to below $1,200, many production companies were in desperate need of operating cash to stay in business.
With more than $600 million in cash as of March 31, Royal Gold was able to offer financial help in exchange for the right to share in the production and profits of its gold-mining partners. This worked out well for Royal Gold in the first quarter of 2014 contributing to its year-over-year quarterly earnings growth of almost 212%.
This lifted the company's trailing 12-twelve month operating margin to a golden 48%. Few publicly-traded companies can boast of a comparable operating margin. Take a look at this 5 year price chart. Notice Royal Gold's operating margin as well as its share price which hit a 17-month high on July 2.
The price of gold is still relatively low, currently around $1,329. If gold moves above $1,400 by the end of 2014, I expect Royal Gold's operating margin to rebound towards the highs of 2012.
That should keep the share price moving steadily higher. As the chart illustrates Royal Gold's stock is volatile enough for new investors to catch a break on a pullback, but so far 2014 is looking more like 2012's price performance.
If so, Royal Gold shares may have bottomed on May 28 at $58.86. There may be some dips lower from here, but don't count on it. My suggestion is to begin accumulating soon and add to your positions IF a price correction ensues.
Royal Gold has 33 years of expertise and knows its business well. It offers investors a 1.1% dividend yield while those streams of royalty checks continue to flow into the company's coffer.
The company steps into the earnings confessional on Aug. 7. Look for Royal Gold to announce that its latest quarterly year-over-year earnings doubled and that revenue increased by about 36%. I'm also anticipating a bump higher in its operating margin.
The future looks bright for Royal Gold, and the timing looks golden for its shareholders.
At the time of publication the author had positions in RGLD and ABX.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates ROYAL GOLD INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate ROYAL GOLD INC (RGLD) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, expanding profit margins, solid stock price performance and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- RGLD's debt-to-equity ratio is very low at 0.13 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 27.73, which clearly demonstrates the ability to cover short-term cash needs.
- The gross profit margin for ROYAL GOLD INC is currently very high, coming in at 93.66%. Regardless of RGLD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RGLD's net profit margin of 34.87% significantly outperformed against the industry.
- Powered by its strong earnings growth of 210.00% and other important driving factors, this stock has surged by 89.36% over the past year, outperforming the rise in the S&P 500 Index during the same period. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
- RGLD, with its decline in revenue, underperformed when compared the industry average of 4.4%. Since the same quarter one year prior, revenues fell by 22.1%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Metals & Mining industry average, but is greater than that of the S&P 500. The net income increased by 211.7% when compared to the same quarter one year prior, rising from $6.46 million to $20.14 million.
- You can view the full analysis from the report here: RGLD Ratings Report
Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.