The shopping season is upon us. Instead of heading to the mall or our favorite online retailer, though, we're heading to the hills in search of gold. On today's docket is Royal Gold (NASDAQ: RGLD). A royalty and streaming company, Royal Gold provides up-front payments to miners, and in exchange, it receives the right to purchase the mined metal at a preset price or to receive a percentage of mineral production.
Flourishing in 2017, Royal Gold's stock is up more than 29%, surpassing the S&P 500 and the price of gold which are up 17% and 13%, respectively, as of this writing. Does this mean that investors have missed the boat, or is now still a good time to pick up shares at a reasonable price?
Image source: Getty Images.
A smooth operator
When discussing gold stocks, investors usually assume the conversation pertains to those businesses which are digging the yellow stuff out of the ground. And since these mining companies -- for the most part -- don't represent very compelling investment opportunities, the initial reaction may be to forsake Royal Gold. This would be quite foolish, however. Unlike gold miners, which frequently incur substantial operating costs, Royal Gold is essentially a specialized financier. As such, it enjoys wide margins. Over the past 10 years, for example, Royal Gold has an average gross margin and operating margin of 91% and 40%, respectively according to Morningstar. During this period, while the price of gold has traded anywhere from below $1,000 per gold ounce to more than $1,800 per ounce, Royal Gold has consistently reported strong margins, illustrating how its business model enables it to remain profitable despite volatility in the price of gold.
Besides the healthy margins, Royal Gold has demonstrated the viability of its business model by maintaining strong cash flow.
Image source: Royal Gold.
