Are Franco-Nevada Shares Worth the Premium After a 49% Rally and Analyst Upgrades?

• Curious if Franco-Nevada is a hidden gem or living up to its price tag? You are not alone. Let's break down what makes this stock tick.
• Despite a stellar 49.0% gain so far this year, the shares have taken a breather recently, dropping 14.8% over the past month.
• Several recent analyst upgrades and renewed interest from institutional investors have fueled much of the excitement around Franco-Nevada, even as the broader gold sector sees increased volatility. Headlines about global economic uncertainties have also played a role in the latest price swings.
• Right now, Franco-Nevada scores 1 out of 6 on our valuation checks, which means there is plenty to unpack about its true worth. Stay with us as we walk through traditional valuation methods, and stick around to discover a more insightful way to look at value by the end of the article.

Franco-Nevada scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Franco-Nevada Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its expected future cash flows and discounting them back to today's dollars. For Franco-Nevada, the model uses a 2 Stage Free Cash Flow to Equity approach, relying on both analyst estimates and extended projections.

Currently, Franco-Nevada's last twelve months Free Cash Flow (FCF) stands at $129.7 Million. Over the next 10 years, cash flows are forecasted to gradually increase, reaching just under $1.45 Billion by 2035. The first few years reflect input from up to three different analysts. After that point, Simply Wall St extrapolates the results. These projections take into account Franco-Nevada’s unique royalty business model in the Metals and Mining industry and project moderate cash flow growth over the long term.

Based on this methodology, Franco-Nevada’s estimated intrinsic value is $216.17 per share. However, the DCF implies the stock is trading at a 20.3% premium above this value. This suggests that the stock is priced above what its future cash flows would justify today.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Franco-Nevada may be overvalued by 20.3%. Discover 848 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Franco-Nevada.

Approach 2: Franco-Nevada Price vs Earnings

The Price-to-Earnings (PE) ratio is a widely used metric for valuing profitable companies like Franco-Nevada, as it measures how much investors are willing to pay for each dollar of the company's earnings. This makes the PE ratio especially relevant for firms with steady profits, providing an intuitive way to benchmark value.

Growth expectations and risk play a significant role in determining what a "normal" or "fair" PE ratio should be. Companies with faster growth or lower risk usually justify a higher PE, while those with slower growth or more uncertainty tend to trade at lower multiples.

Currently, Franco-Nevada trades at a PE of 45.8x, which is well above the Metals and Mining industry average of 21.2x and also higher than its peer group at 29.8x. Simply Wall St’s Fair Ratio for Franco-Nevada is 24.6x, which takes into account not only industry trends and peer comparisons, but also factors specific to the company such as profit margins, growth outlook, market cap, and risk profile.

What sets the Fair Ratio apart is that it adjusts for the nuances of Franco-Nevada’s business instead of applying "one size fits all" benchmarks. This tailored approach means the Fair Ratio provides a more actionable perspective for investors deciding whether today's valuation is justified.

Comparing Franco-Nevada’s actual PE with its Fair Ratio suggests the stock is currently valued at a substantial premium, indicating it may be priced above what its fundamental profile would warrant.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1382 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Franco-Nevada Narrative

Earlier, we mentioned there is an even better way to understand valuation. Let's introduce you to Narratives. A Narrative is a simple and powerful tool that lets you combine your perspective or "story" about a company with your own assumptions about its future revenue, profits, and margins. This approach shows you a custom fair value grounded in those beliefs.

Narratives connect a company’s real-world story with a financial forecast, then link that to a fair value, making your investment view both personal and actionable. With Narratives, available to every investor on Simply Wall St’s Community page, you can easily compare your own fair value with the current price and see if you believe the stock is under or overvalued based on your outlook.

This dynamic model automatically updates to reflect the latest news or earnings, so your Narrative always stays relevant and up to date. For Franco-Nevada, one investor’s Narrative might expect record gold prices and smart acquisitions to drive sustained earnings growth and a high fair value, while another could highlight risks from falling gold demand or asset concentration and estimate a much lower value.

Do you think there's more to the story for Franco-Nevada? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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