1 year ago, Geo released Q3 earnings, so I am hoping today is the day. Here are some facts that although seem obvious, require reminding because our emotions tend to cloud our judgement.
- The share price movement after earnings does not represent the quality of the earnings report. The quality is for you as an investor to decide. Do you like the story?
- On the same note, don't try to predict whether the price will go up or down after earnings release, it is completely unpredictable, even if 10/10 things are going right, it can still go down.
- There will always be some justification for the price movement after earnings, but it's all about perspective. Assuming the scenario whereby production is mediocre (1.5-2m), but profit is high as a result of coal prices:
--> If the price goes up, people will say it's because of record profit
--> On the other hand, if the price goes down, people will say it is because production level was disappointing
It is exactly the same scenario, but different interpretation.
What truly matters:
I think everyone invests in companies because we want a share of the money they make, so we all want them to make MONEY, NOT coal. Coal 可以吃的吗? Our shares in Geo are quoted in SGD, not in metric tonnes. It's more favourable if they make a record profit without meeting their production target, than to exceed their production target but make less profit. The production target was given in the first place to allow us to make a rough estimation of their FY2017 profit based on the fluctuating coal prices. But if they mine 8m tonnes for the entire year and their profit is more than last year's, then all the better. Less effort, more results, good for the weary miners, good for us. I personally think they will do better than 2.2m tonnes, and I have my reasons for that, but I don't really care because my eye is on the money.
Given their current grossly undervalued P/E ratio, I don't even think there is any growth expectation priced into this thing. It is priced as if coal prices are nose-diving and all the miners went on strike. In about 2-3 years time, at this coal price and stock price, the P/E ratio is going to be 2. The company will generate enough money to buy itself up in 2 years. So, if the stock price drops today on good results, we all know what we're buying for ourselves this Christmas :)
On a side note, I remember in April the stock price fell from 0.34 to 0.25, rationalized by coal prices "plunging" from $44 to $36 per ton. Now that the coal prices are at record highs, the stock price hasn't recovered, and people blame "low production". There will always be people attempting to rationalize the price of a stock and there will always be something to blame but it's a futile attempt. Here are 5 reasons why Geo today is better than Geo 8 months ago:
1. They have settled the MTN debt issue
2. They are producing more coal tonnage than last year
3. The coal price is higher today
4. They have a new mine acquisition completed with an offtake agreement 99% guaranteed
5. The company is selling cheaper than it was 8 months ago - so how do you rationalize this?
Simplistically, in the long-run, earnings are DIRECTLY correlated to the value of a stock. It is that easy, doesn't take a genius to know that. The key is to find out what drives the earnings, and in Geo it is very easy to see. Ultimately, more money earned is more money in the bank account. You are a shareholder, you own a share of the earnings, and it will become yours eventually (dividends, share buybacks, company buyout, net equity increase), so just be patient, give them a few years, keep your eye on their profit, and don't hope for a stock price spike up after the report. It is clear that the company is doing well, we don't need the stock price movement to validate our analysis. Thanks for reading.