Index inclusion puts Natural Resource Partners (NRP) on more investors' radar

Natural Resource Partners (NRP) was recently added to the S&P/TSX Global Mining Index, an event that can increase its visibility as index tracking funds and institutional investors review their allocations.

That index inclusion comes after a period of strong momentum, with a 90 day share price return of 21.30% and a 1 year total shareholder return of 22.54%, while the 3 year and 5 year total shareholder returns are very large.

If you are scanning for other resource linked ideas, this could be a good moment to review the 26 best rare earth metal stocks

With an intrinsic value estimate that sits about 28% above the recent US$125.40 unit price and very large multi year returns already on the board, you have to ask: is there still a buying opportunity here, or is the market already pricing in future growth?

Price-to-Earnings of 12.4x: Is it justified?

On a P/E of 12.4x, Natural Resource Partners looks cheaper than both its US Oil and Gas industry group on 15.9x and its direct peer average on 21.2x, even with the recent strong unit price performance.

The P/E multiple compares the current unit price to earnings per unit, so it gives you a quick sense of how much investors are paying for each dollar of profit. For a business reporting high quality earnings, a 21.6% Return on Equity and net profit margins of 66%, a 12.4x P/E suggests the market is not assigning a premium to those profitability metrics at the moment.

Compared with the broader US Oil and Gas industry on 15.9x, NRP’s lower 12.4x P/E points to a discount. The gap looks even wider versus the 21.2x peer average. That difference implies the market is pricing NRP’s earnings more cautiously than many similar companies, despite its profitability profile and long term total return record.

Result: Price-to-Earnings of 12.4x (UNDERVALUED)

However, that potential discount comes with real risks, including exposure to coal related assets and reliance on royalty income tied to underlying resource activity.

Another View: Our DCF model points to a larger gap

While the 12.4x P/E suggests NRP trades at a discount to peers, the SWS DCF model goes further and estimates fair value at $174.39 per unit versus the recent $125.40 price. That implies roughly a 28% gap, so is the market being too cautious, or is the model too optimistic?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Natural Resource Partners for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 58 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With the mix of strong past returns, an apparent valuation gap, and clear exposure to sector specific risks, it is worth checking the numbers yourself soon and deciding where you stand. Then weigh both sides by taking a closer look at the 1 key reward and 1 important warning sign.

Looking for more investment ideas?

If NRP has caught your attention, do not stop here. Broaden your watchlist with other focused ideas that could fit different roles in your portfolio.

• Target dependable cash generators by scanning for high yield opportunities in the 13 dividend fortresses.
• Hunt for potential bargains across the market by sorting through the 58 high quality undervalued stocks.
• Prioritise resilience and capital protection by checking companies screened in the 73 resilient stocks with low risk scores.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.