When a stock grows by 25% or more, 20x earnings looks like a great deal.
Despite a positive day for the stock market, it was an extraordinary day for MP Materials, a rare earth metals mining company.
After the previous evening’s announcement of fiscal Q3 earnings, MP stock spiked 8.7% on the reopening of markets. Passing both top and bottom-line analyst expectations, MP stock spiked 8.7%. In contrast to Wall Street’s prediction that MP would earn $0.30 per share (pro forma), the company earned $0.36 per share, a 20% increase. MP exceeded expectations by six and a half percent, delivering $124.4 million versus the Street’s $116.8 million forecast.
In those days, the positive numbers weren’t even close to peaking.
What’s Happening Then?
Sales and earnings at MP Materials didn’t just exceed expectations. They grew 25% and 43% year over year, respectively, with earnings increasing nearly twice as fast as sales. To be precise, net income grew 48%, but earnings per share, calculated according to generally accepted accounting principles (GAAP), increased by 43%.
Rare earth oxide production and sales fell in Q3 2022 compared to Q3 2021. There was a decline of 9% in production and a decline of 17% in sales. However, the price of rare piles of the earth has risen 51% yearly due to the high demand for these minerals.
Even though MP Materials sold less in Q3 2022, it made more money than it did in the previous quarter.
The company’s primary revenue source is unprocessed rare earth oxides, which it mines and sells now. MP announced in Q3 that its Stage II operations had been officially commissioned, refining rare piles of earth from oxides to purer forms, like neodymium-praseodymium elements, for downstream sale.
In Stage III, these elements are made into rare earth magnets to increase their value even further. In a coincidental twist, MP announced that in Q3, it finished constructing the building shell that will house its magnetic facility, completing a value-added chain that should significantly boost its profitability.
Soo…
Is there a dollar and cent value to all of this? The market capitalization of MP Materials stock stood at $5.6 billion as of Friday’s closing bell. The company’s cash-rich balance sheet ($600 million more cash than debt) further reduces its enterprise value to just $5 billion. Accordingly, MP Materials’ price-to-earnings ratio is just 20 times earnings, after accounting for the $250 million net profit it generated over the past 12 months.
According to analyst projections compiled by S&P Global Market Intelligence, MP Materials stock is valued if it grows at 20% or higher over the next five years. However, Wall Street expects MP to grow its earnings by 24.5% annually.
Considering American industrial policy in separating itself from China’s rare earth metal supply and supporting a domestic supply chain capable of producing electric vehicles, wind turbines, and other rare-earth-consuming technology, I believe 24.5% is an achievable target, which case, MP Materials’ stock may be undervalued at present.
It must be admitted, however, that there are caveats and provisos. There is a continuing deficit between free cash flow and reported earnings at MP. Once MP’s upgraded facilities are completed, capital spending is expected to wind down, and free cash flow will begin to increase, eventually matching earnings. (MP generated only $94 million in positive free cash flow during the past 12 months.)
Over the past year, MP Materials stock has tracked the S&P 500’s performance, down 21%. However, its growth prospects look significantly higher than the average S&P stock, making it an attractive buy.