Is Freeport-McMoRan On Its Way to Former Highs?

With shares of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) trading at around $35.40, is RF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Freeport-McMoRan is up over 5 percent today after beating expectations and offering strong guidance. Q4 EPS was $0.78. Q4 revenue was $4.50 billion. FY2012 EPS was $3.19. Most importantly, gold sales are expected to increase 37 percent, and copper sales are expected to increase 18 percent in 2013.

Gold and copper prices were lower in 2012, but lower prices were offset by high volumes. Freeport-McMoRan sold 972 million pounds of copper in Q4, which beat expectations of 930 million ponds. Gold production was up 39 percent to 251,000 ounces.

fresh header mergers acquisitions 300x50

Freeport-McMoRan made two large investments in 2012, which included Plains Exploration & Production Co. (NYSE:PXP) and McMoRan Exploration Co. (NYSE:MMR). This was done in an attempt to get involved in the energy business. Freeport-McMoRan investors were none too pleased with the news. They felt that these investments would only act as distractions, and that they were too expensive in the first place. This means that Freeport-McMoRan is not likely to make any similar purchases in the near future. Yes, investors have that much power at times.

Start 2013 better than ever by saving time and making money with your Limited Time Offer for our highly-acclaimed Stock Picker Newsletter. Click here for our fresh Feature Stock Pick now!

What these same investors must realize is that Freeport-McMoRan made these moves for a reason, which relates to a slowing copper business. Mines are aging, ore grades are declining, and costs are rising. If Freeport-McMoRan can establish itself in the energy business now, it could pay off handsomely in the future. These large investments aren’t sure bets, but the rewards are potentially tremendous.

Now let’s take a look at some important numbers for Freeport-McMoRan…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Freeport-McMoRan is strong. This company has been managing debt well. The balance sheet is in positive territory, and operating cash flow is $3.26 billion.

Debt-To-Equity

Cash

Long-Term Debt

FCX

0.17

$3.73 Billion

$3.52 Billion

SCCO

0.42

$1.54 Billion

$2.74 Billion

 

T = Technicals on the Stock Chart Are Strengthening

Freeport-McMoRan has underperformed Southern Copper Corp. and the S&P 500 by wide margins over the past three years. However, there’s a good chance that today’s news will lead to at least a temporary trend change.

1 Month

Year-To-Date

1 Year

3 Year

FCX

6.35%

4.43%

-14.97%

4.32%

SCCO

10.34%

9.61%

31.03%

78.04%

S&P 500

4.03%

4.28%

15.54%

41.82%

 

At $35.40, Freeport-McMoRan is still trading below all its averages.    

50-Day SMA

35.55

100-Day SMA

37.52

200-Day SMA

36.07

 

E = Earnings Have Been Improving

Earnings have been improving on annual basis since 2008. Revenue has been improving on an annual basis since 2009. However, EPS for 2012 was $3.19, and revenue was only $18 billion. Q4 numbers and guidance saved the day.

2007

2008

2009

2010

2011

Revenue ($)in billions

16.94

17.80

15.04

18.98

20.88

Diluted EPS ($)

3.75

-14.86

2.93

4.57

4.78

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

5.20

4.16

4.61

4.48

4.42

Diluted EPS ($)

1.10

0.68

0.80

0.74

0.86

 

T = Trends Do Not Support the Industry

Luckily, Freeport-McMoRan is in a position in which volume can offset weak commodity prices. While many longs don’t want to admit it, the commodity boom has peaked. It’s possible that there will be another commodity boom down the road, but commodities are currently stuck in a trading range.

Conclusion

Due to a weak environment, it’s highly unlikely that Freeport-McMoRan will reach former highs at any point in the near future. On the other hand, the stock has plenty of room to run from here as long as the broader market stays afloat. This is a well-run company with solid margins, good cash flow, a healthy balance sheet, as well as organic growth (for the most part) and the potential for growth through acquisitions.

Freeport-McMoRan is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.