If Donald Trump wins, this stock should soar

The US Presidential election will finally be over on Tuesday 8 November. It’s been a long and interesting campaign, but we are still no nearer at this point to knowing whether Trump or Clinton will win. In fact, the latest polls show that Clinton’s lead over Trump has been slashed following the FBI’s announcement that it is investigating new Clinton-linked emails.

While the stock market may favour a Clinton win due to the higher certainty that she may bring to domestic and foreign policy, there is one stock which could benefit from a Trump win. That company is Mexican gold and silver miner, Fresnillo (LON:FRES).

Wide open

The race for the Presidency has been volatile. Just when it seemed as though a Clinton win was a foregone conclusion, Trump has somehow made a comeback according to the opinion polls. One estimate puts the likelihood of a Clinton victory at 68%, another that Clinton has a 1% lead over Trump. In my view, this means that the election remains wide open. Although a Clinton victory may be probable, Trump could still win.

Of course, the value of opinion polls is questionable. As we saw in the UK with the 2015 General Election and the EU Referendum this year, polls can be inaccurate. In both of those instances (and particularly in the EU Referendum), there was a social stigma attached to voting either Conservative or to leave the EU. This could be why the polls underestimated support for both camps. With Trump being a divisive figure who is deeply unpopular among large parts of the US population, it is entirely plausible that polls have underestimated his support.

Peso poll

One interesting poll used to determine the popularity of Trump during the election campaign has been the US dollar to Mexican peso exchange rate. It has fluctuated wildly in recent months. The peso has depreciated as Trump has gained in popularity, and appreciated whenever Clinton has edged in front in the polls. The exchange rate has done this partly because of Trump’s pledge to build a wall between the US and Mexico, while other factors such as weakening productivity as well as a structural deterioration in Mexico’s economy have also contributed to the peso’s weakness.

Given the highly positive correlation between the strength of the peso and Trump’s popularity, it seems likely that a Trump win would cause a depreciation in the peso. This would be excellent news for Fresnillo, since its gold and silver mines are in Mexico. Therefore, it would receive payment in dollars for the silver and gold it produces, while its costs when translated into dollars would be lower. Therefore, Fresnillo’s profitability could gain a boost from a Trump victory simply because of favourable currency movements.

Gold appeal

Fresnillo may also benefit from a Trump victory because of higher demand for gold. History shows that during periods of economic and political uncertainty, the popularity of gold increases. Whether you agree or disagree with Trump’s policies, it is generally agreed that his victory would be likely to lead to considerable uncertainty. His domestic and foreign policies would represent a step change from the status quo and could lead to investors turning to perceived stores of wealth, such as gold.

Although Fresnillo is not a pure play gold miner, gold is becoming a more important part of its business. Despite being the world’s largest silver miner, the lion’s share of Fresnillo’s revenue in the most recent half year came from gold. In fact, 56% of Fresnillo’s adjusted revenues were from gold in H1 2016 versus 36% for silver. In H1 2015, these figures were 51% for gold and 40% for silver. The shift towards gold is part of Fresnillo’s wider strategy, with the company’s gold production rising by 23% in H1. Therefore, it could become a major beneficiary of increased demand for gold in the event of a Trump victory.

Fundamentals

As well as having the potential to benefit from a Trump victory, Fresnillo represents a logical long-term buying opportunity. Its financial standing is sound, with the company’s balance sheet having modest leverage. For example, Fresnillo has a net debt to equity ratio of 8.6%, which indicates that its balance sheet risk is low. It also means that the company may be able to increase debt levels in order to develop assets for future production.

Fresnillo’s capital expenditure also has scope to rise, since net operating cash flow was sufficient to cover it more than twice in the first half of the current year. Free cash flow covered dividends 8.4 times in the first half of the current year, which indicates that additional investment and/or higher dividend payments could lie ahead. 


In terms of its valuation, Fresnillo has a forward P/E ratio using 2016’s forecast EPS of 49.1. While this may seem high, Fresnillo is forecast to increase its EPS by 61% in the 2017 financial year. This is from a mixture of higher production and greater efficiencies generated throughout the business. As mentioned, should Trump win, Fresnillo could benefit from a positive currency effect which could improve its profitability yet further.

Looking ahead

Clearly, the US election is highly uncertain and the prospect of a Trump victory is unlikely according to recent polls. However, it is still possible and it could prove to be a good thing in the short run for Fresnillo. Not only could it benefit from a weaker peso, the popularity of gold may also increase as investors seek lower risk assets which have historically been a store of wealth. With Fresnillo becoming more reliant on gold for its revenue, a rising gold price could positively catalyse its share price.

Fresnillo’s fundamentals are also sound. Its debt levels are very modest and its valuation can be justified when its growth forecasts are factored in. Therefore, even if Trump does not win the election, Fresnillo remains a sound long term buy. If he does win, Fresnillo could make rapid gains in a short space of time.