In the royalty business, the reliance of investors on analyst price targets appears to have significantly more sway than in other industries. After all, putting a valuation on a stream of future cash flows, cash flows which may be easier to accurately predict in a royalty or streaming business, is a task much better suited for analysts.
On Friday, shares of Alaris Royalty Corp. (TSX:AD) jumped more than 5% on news that Scotiabank had increased its price target on the company from $24 to $25, listing an outperform rating amid other analyst estimates which have not been as kind.
The company's performance in recent years has been stable, with free cash flow growing steadily each year since 2011. The company's price to free cash flow ratio currently sits below 15, and the company's valuation multiples are also attractive, with Alaris' price to earnings (P/E) ratio sitting just above 13.
Given the improving economic environment for mining companies, I expect the royalty business to maintain a level of stability for some time to come.
With a yield of 7.4% currently, investors interested in a long-term income play in the royalty space should certainly give Alaris a look, due to the company's strong fundamentals and the ability of the company to continue to grow free cash flow in a relatively volatile commodities market.
With a share price currently far below its all-time high experienced in recent years, Alaris can provide long-term investors with significant capital appreciation upside along with a lofty yield.
Invest wisely, my friends.
