MP Materials (NYSE:MP) owns and operates the only rare earth mine and processing plant in the United States. It is an open-pit mine in Mountain Pass, California. Currently, MP stock has a market capitalization of $4.6 billion. Moreover, it produced 15.8% of the world’s rare earth minerals in 2020.
Most of these rare earth elements (REE) are used in electric vehicle (EV) manufacturing and other high-tech industries. Part of what makes MP Materials attractive is that scarcity value; it is what’s going to keep MP stock worth a great deal, especially as demand for these materials rises over the next several decades.
So, here’s what you should do with MP stock as we progress further into 2021 and the era of EVs.
MP Stock: Earnings Growth and Valuation
When it comes to MP stock, it doesn’t hurt that this company is now very profitable. On May 6, MP Materials reported that Q1 revenue rose 189% year-over-year (YOY) to $60 million. Net income was also up to $16.1 million, an increase of 737% YOY.
According to the company, much of this was due to higher rare earth oxide (REO) prices. Its realized REO prices were up 132% while the production costs were up just 13% on a YOY basis. That translates into operating leverage and higher profits.
In fact, the company’s adjusted net income (mostly after taking out stock-based compensation expenses) grew 801% YOY or essentially eight times to $23.2 million. MP Materials did not state what this translates into when it comes to adjusted earnings per share (EPS). However, given that there were 179.3 million diluted shares outstanding, the adjusted EPS should be 12.93 cents per share. That works out to 51.72 cents annualized on a run-rate basis.
At $26.50 per share as of May 24, this puts MP stock on a price-to-earnings (P/E) multiple of about 51 times earnings. Moreover, analysts put its 2022 earnings forecast at 70 cents per share. That lowers the forward P/E multiple to about 38 times.
That is a high valuation, but not too high given how scarce the materials that MP sells are. This is especially the case since the U.S. needs these rare earth materials for batteries, as well as for catalysts and magnets.
Today, China, Vietnam and Brazil account for the lion’s share of the world’s REE reserves, according to the U.S. Geological Survey. The U.S. accounts for just 1.1% of the world’s total reserves. However, its production was 12.3% in 2019, compared to China’s 62.8% share of world production.
Where This Leaves MP Stock
As I said before, though, MP Materials is the only U.S. source of these rare earth materials. This puts its value much higher than just the numbers. Moreover, according to CNBC, the United States now has a new policy of trying to play catch up with China. The Wall Street Journal also recently produced a video about this kind of catching up. As a result, the value of MP Materials to the U.S. as a strategic asset is extremely high.
This easily gives it a premium for control and a premium over its normal valuation. I would even argue this means the stock should have a two-to-three times valuation premium.
Let’s assume that, under normal circumstances, MP stock would have a 15 times P/E ratio. For example, Freeport McMoran (NYSE:FCX) trades at about 15 times earnings for 2021 and 12 times for 2022. Therefore, three times that value would be 45 times for 2021 and 36 times for 2022.
This puts MP stock’s value at 45 times $0.5172 EPS for 2021 (or $23.29) and 36 times 70 cents for 2022 (or $25.20 per share). These are close to but just under the existing price of $26.50.
Therefore, we can say that, given the company’s earnings profile for this year and next, MP stock is probably fairly valued. Yet, as earnings and production grow — especially if President Joe Biden and his administration assist the company — this name’s value could move higher.
So, patient investors should look for an opportunity to buy in cheaply or with a bargain element. Additionally, those that already own can believe they are likely not overpaying for MP stock. All evidence points to its value growing over time.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.