Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Kirkland Lakes Gold Ltd (TSE:KL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Kirkland Lake Gold Inc is a Canada-based exploration gold mining company. The Company’s properties located in the Kirkland Lake gold camp, including the Macassa Mine Complex, are located near the town of Kirkland Lake, Ontario and consist of approximately five contiguous gold properties known as the Macassa, Lake Shore, Wright-Hargreaves, Teck-Hughes and Kirkland Minerals properties and their respective, formerly producing, underground gold mines. Its mines produces approximately 20 million ounces of gold at an average grade of over 15.1 grams per ton. Its Macassa Mine Complex includes production from the 04/Main Break and the South Mine Complex (SMC), and the Macassa Mill. The East Timmins Assets include the Holt, Holloway and Taylor mines and the Holt Mill. The Lake Shore mine is located in the center of the Kirkland Lake camp bounded to the west by the Teck-Hughes mine and to the east by the Wright-Hargreaves mine.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$2,180,563,000||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.09||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-336.59%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||29.41||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.26||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.09||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.43||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Fail|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||12.12%|
|MG Value based on 3% Growth||$5.19|
|MG Value based on 0% Growth||$3.04|
|Market Implied Growth Rate||10.50%|
|% of Intrinsic Value||90.09%|
KIRKLAND LAKE GOLD LTD does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $0.2 in 2012 to an estimated $0.36 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 10.5% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into KIRKLAND LAKE GOLD LTD revealed the company was trading above its Graham Number of $9.49. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 29.5, which was below the industry average of 47.18, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.06.
KIRKLAND LAKE GOLD LTD scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$0.06|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||9/1/2016|
|Total Current Assets||$256,692,000|
|Total Current Liabilities||$123,093,000|
|Shares Outstanding (Diluted Average)||117,441,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$0.86|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.36|
Other ModernGraham posts about the company
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.