Natural Resource Partners (NRP) has drawn fresh attention after its recent trading showed the stock down about 5% over the past month and roughly 17% over the past 3 months, prompting a closer look at fundamentals.

At a share price of US$96.0, Natural Resource Partners has seen its short term momentum fade, with the 7 day share price return down 3.81% and the 90 day share price return down 17.04%, even as the 5 year total shareholder return sits at a very large level, above 5x.

If this kind of move has you thinking about where else capital could work, it may be worth scanning the market for other energy related royalty and resource plays using our 29 best rare earth metal stocks

Bulls see Natural Resource Partners as a cash generative royalty business that the recent pullback has left at a discount, while bears focus on concentration risk and cyclicality. Which side does the valuation evidence lean toward?

Price-to-Earnings of 11.2x: Is it justified?

On recent prices, Natural Resource Partners trades on a P/E of 11.2x, which sits well below both the peer group average of 20.5x and the broader US Oil and Gas industry average of 13.9x.

The P/E ratio compares the current share price with earnings per unit, so it effectively tells you how many dollars investors are currently paying for each dollar of earnings. For a royalty focused business that reports high quality earnings and a net profit margin of 58.5%, this is a key yardstick for how the market is pricing that income stream.

NRP screens as good value on this measure, with the current 11.2x P/E suggesting the market is assigning a lower price tag to its earnings than to peers with an average P/E of 20.5x. Compared to the US Oil and Gas industry average of 13.9x, the discount is still clear, which raises the question of whether the recent decline in earnings over the past year is weighing more heavily on sentiment than on long term fundamentals.

Result: Price-to-Earnings of 11.2x (UNDERVALUED)

Beyond earnings multiples, the SWS DCF model values Natural Resource Partners at $203.11 per unit, compared with a last close of $96.0, implying a large discount based on projected future cash flows. The model works by estimating the cash the business could generate in future periods and discounting those amounts back to today using a required rate of return.

For a mineral rights and royalty business like NRP, where revenue is tied to production on leased properties and the cost base can be relatively lean, a cash flow based view can be particularly helpful. It focuses attention on the durability and timing of royalty payments across coal, soda ash and other natural resources, rather than short term earnings swings.

Result: DCF Fair value of $203.11 (UNDERVALUED)

However, Natural Resource Partners still faces risks, including its reliance on US coal-linked royalties and outcomes that depend heavily on future commodity demand and production volumes.

Another View on Natural Resource Partners' Valuation

The P/E comparison presents Natural Resource Partners as relatively cheap, but the SWS DCF model goes further by valuing the units at $203.11 versus the current $96.0, suggesting a very wide gap. If both earnings and cash flow perspectives indicate value, it raises the question of what the market might be pricing in that these models do not capture.

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 45 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

If the mix of potential rewards and risks around Natural Resource Partners feels finely balanced, now is the time to review the data yourself and decide where you stand, then weigh both sides with the help of our 1 key reward and 1 important warning sign

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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.