Comparing Yamana Gold Inc. (AUY) and Gran Tierra Energy Inc. (GTE)

Yamana Gold Inc. (NYSE:AUY) shares are up more than 39.41% this year and recently decreased -1.79% or -$0.06 to settle at $3.29. Gran Tierra Energy Inc. (NYSE:GTE), on the other hand, is down -34.10% year to date as of 08/13/2019. It currently trades at $1.43 and has returned -1.38% during the past week.

Yamana Gold Inc. (NYSE:AUY) and Gran Tierra Energy Inc. (NYSE:GTE) are the two most active stocks in the Gold industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect AUY to grow earnings at a 3.54% annual rate over the next 5 years. Comparatively, GTE is expected to grow at a 10.00% annual rate. All else equal, GTE’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 27.37% for Gran Tierra Energy Inc. (GTE). AUY’s ROI is -3.10% while GTE has a ROI of 7.00%. The interpretation is that GTE’s business generates a higher return on investment than AUY’s.

Cash Flow

Cash is king when it comes to investing. AUY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, GTE’s free cash flow per share was -0.12. On a percent-of-sales basis, AUY’s free cash flow was 2.65% while GTE converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, AUY is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. AUY has a current ratio of 1.70 compared to 1.10 for GTE. This means that AUY can more easily cover its most immediate liabilities over the next twelve months. AUY’s debt-to-equity ratio is 0.47 versus a D/E of 0.51 for GTE. GTE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AUY trades at a forward P/E of 29.37, a P/B of 0.78, and a P/S of 1.80, compared to a forward P/E of 7.08, a P/B of 0.54, and a P/S of 0.87 for GTE. AUY is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AUY is currently priced at a -14.77% to its one-year price target of 3.86. Comparatively, GTE is -69.7% relative to its price target of 4.72. This suggests that GTE is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AUY has a beta of 0.93 and GTE’s beta is 0.92. GTE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AUY has a short ratio of 0.44 compared to a short interest of 3.57 for GTE. This implies that the market is currently less bearish on the outlook for AUY.

Summary

Gran Tierra Energy Inc. (NYSE:GTE) beats Yamana Gold Inc. (NYSE:AUY) on a total of 9 of the 14 factors compared between the two stocks. GTE has higher cash flow per share, is more profitable and generates a higher return on investment. In terms of valuation, GTE is the cheaper of the two stocks on an earnings, book value and sales basis, GTE is more undervalued relative to its price target.