The present time may prove to represent a superb opportunity to buy top quality resources companies at discounted prices. After all, the outlook is rather downbeat for commodity prices (in the short term at least) and appealing valuations across the resources space indicates that there are considerable margins of safety on offer.
Of course, some resources companies have delivered excellent share price growth, with Newcrest Mining Limited (ASX: NCM), for example, seeing its share price rise by 23% since the turn of the year. And, while Woodside Petroleum Limited (ASX: WPL) has fallen in value by 7% so far this year, it has outperformed many of its oil sector peers. Looking ahead, which one will outperform the other over the medium term?
Growth potential
While the price of gold has fallen in recent years, over the last year its performance has been much more stable than that of oil. As such, Newcrest's bottom line is set to considerably outperform that of Woodside over the next couple of years, with the former expected to post a rise in net profit of around 33% per annum during the next two years, while the latter is forecast to see an annualised fall of around 25% during the same time period.
Clearly, Newcrest's better outlook could act as a positive catalyst and, encouragingly for the company's investors, such strong performance does not appear to be priced in. That's because, while Newcrest does trade on a rather rich price to earnings (P/E) ratio of 21.2, when this is combined with its growth forecasts it equates to a price to earnings growth (PEG) ratio of just 0.65. And, with Woodside's forward P/E ratio (using financial year 2016's numbers) being 17.7, it appears as though Newcrest offers a much wider margin of safety than Woodside.
Financial standing
Since the gold price's main fall was between 2012 and 2014, Newcrest has already experienced a challenging period that has tested its financial standing. And, in recent years, it has endured a period of cost cutting and has been forced to improve its efficiency, thereby becoming leaner and, in the long run, more profitable. And, with Newcrest having a debt to equity ratio of 53%, its balance sheet appears to be only modestly leveraged, with positive free cash flow even during a challenging period highlighting that the company is highly sustainable.
Clearly, Woodside is renowned by investors for its financial strength and, in addition to an excellent balance sheet and superb cash flow, Woodside also enjoys a considerable size and scale advantage over Newcrest. This means that, while its bottom line may be on the decline, it is still expected to yield 5% in the current year and 4.5% next year, thereby making it the obvious choice for income investors – especially since Newcrest is not expected to pay a dividend in either of the next two years.
External Factors
While both stocks are dependent upon the prices of the commodities they produce, they have little (if any) control over pricing and, as such, are price takers. And, with forecasts surrounding the prices of gold and oil being notoriously unreliable, it seems logical to invest in Newcrest rather than Woodside at the present time. That's because it offers a wider margin of safety and a clear catalyst to push its share price northwards, with its financial standing being sound and investor sentiment being strong. The only caveat, of course, is if you are seeking a dividend, in which case Woodside remains the only choice of the two companies.
