Is Barrick Gold Undervalued?

GOLDWith shares of Barrick Gold (NYSE:ABX) trading around $15, is ABX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Barrick Gold is engaged in the production and sale of gold, as well as exploration and mine development. The company also produces copper and holds other interests, which include a nickel development project. Barrick Gold’s business is organized into seven primary operating segments: four regional gold businesses, a global copper business unit, an oil and gas business, and a capital projects group. Its gold, copper, nickel, and oil and gas businesses and interests are dispersed around the world.

Gold prices continue to decline, as demand for this precious metal is not what it once was. The future doesn’t look so bright from the perspective of commodity-focused companies, as prices around the world continue to drop. Look for changes in gold, oil, and gas prices to have significant effects on the future profits of companies like Barrick Gold.

T = Technicals on the Stock Chart are Weak

Barrick Gold stock has seen a disastrous decline over the last couple of years. The stock is now trading at lows not seen in over a decade. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Barrick Gold is trading below its declining key averages, which signal neutral to bearish price action in the near-term.

ABX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Barrick Gold options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Barrick Gold Options

62.35%

63%

61%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Barrick’s stock.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on Barrick Gold’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Barrick Gold look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-18.27%

-418.65%

-54.41%

-35.34%

Revenue Growth (Y-O-Y)

-5.68%

11.35%

-13.47%

-4.04%

Earnings Reaction

4.26%

1.04%

-7.43%

-6.59%

Barrick Gold has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Barrick Gold’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Barrick Gold stock done relative to its peers, Goldcorp (NYSE:GG), Newmont Mining (NYSE:NEM), Freeport McMoRan (NYSE:FCX), and the overall sector?

Barrick Gold

Goldcorp

Newmont Mining

Freeport McMoRan

Sector

Year-to-Date Return

-56.78%

-29.81%

-41.11%

-17.92%

-47.55%

In a weak sector, Barrick Gold has been a poor relative performer, year-to-date.

Conclusion

Barrick Gold is a gold mining firm that also has interests in copper, nickel, oil, and gas projects around the world. The company’s stock hasn’t done very well in the last two years, and is now trading at lows not seen in over a decade. Over the last four quarters, earnings and revenue figures have declined, which has produced mixed feelings among investors in the company. Relative to its weak peers and sector, Barrick Gold has been a poor year-to-date performer. STAY AWAY from Barrick Gold for now.

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