Will Freeport-McMoRan Tank in 2013?

With shares of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) trading at around $32.79, is CAT 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 has made some big bets in regards to acquisitions. These big bets focused on oil and natural gas, and they included the acquisitions of Plains Explorations & Production Company (NYSE:PXP) as well as McMoRan Exploration Co. (NYSE:MMR).  For the most part, investors haven’t been fond of these moves. They feel that these acquisitions spread the company too thin. Freeport-McMoRan has stated that these decisions were made based on “magnificent opportunity.” Freeport-McMoRan also sees oil and natural gas as good hedge against its current mining operations. In a way, both parties are correct. Will these acquisitions spread the company too thin? Probably. Are these good hedges against current mining operations? They have that potential.

As far as gold goes, it’s closer to its peak than its bottom. This is the case for commodities in general. Many speculators are living the high life right now, which has a lot to do with the Federal Reserve’s monetary policies. Eventually, we will be faced with a massive amount of deleveraging. This will lead to a decline in global demand for commodities. It’s simply not possible to undergo massive deleveraging and show impressive growth at the same time. Think of it on a company-specific basis. Can a company show sustainable and impressive growth while undergoing a massive restructuring plan and paying off enormous amounts of debt? No. The basic point here is that commodities must come down in the future, which is a bad sign for Freeport-McMoRan.

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The chart below compares fundamentals for Freeport-McMoRan, Southern Copper Corp. (NYSE:SCCO), and Newmont Mining (NYSE:NEM). These three companies are somewhat similar in size. Freeport-McMoRan has a market cap of $31.14 billion, Southern Copper has a market cap of $30.30 billion, and Newmont Mining has a market cap of $19.20 billion.

FCX

SCCO

NEM

Trailing   P/E

10.28

15.72

10.65

Forward   P/E

6.95

13.08

7.94

Profit   Margin

16.89%

29.01%

18.33%

ROE

19.97%

44.00%

13.41%

Operating   Cash Flow

$3.77 Billion

$2.00 Billion

 $2.37 Billion

Dividend   Yield

3.90%

2.70%

4.30%

Short   Position

4.00%

N/A

3.40%

 

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Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Freeport-McMoRan is stronger than the industry average of 0.30.

Debt-To-Equity

Cash

Long-Term Debt

FCX

0.17

$3.70 Billion

$3.53 Billion

SCCO

0.88

$2.59 Billion

$4.21 Billion

NEM

0.37

$1.65 Billion

$6.30 Billion

 

T = Technicals Are Weak  

Freeport-McMoRan hasn’t performed well over the past three years, and this has been during a raging bull market. The 3.90 percent yield helps ease the pain a little, but it’s certainly not enough to make up for the losses.

1 Month

Year-To-Date

1 Year

3 Year

FCX

-1.50%

-3.24%

-5.90%

-15.42%

SCCO

-4.96%

-4.78%

31.70%

29.08%

NEM

-0.62%

-15.86%

-16.82%

-24.14%

 

At $32.79, Freeport-McMoRan is trading below all its simple moving averages.

50-Day   SMA

33.46

100-Day   SMA

34.32

200-Day   SMA

35.63

 

E = Earnings and Revenue Have Suffered a Setback             

Many companies have suffered an earnings setback recently. Freeport-McMoRan falls into that category. Prior to 2012, revenue and earnings had consistently improved on an annual basis, but the near future doesn’t look as certain. However, Freeport-McMoRan does have an FY2013 EPS expectation of $4.38, which would be an improvement over 2012, but it would still be lower than 2011 and 2010.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

17.80

15.04

18.98

20.88

18.01

Diluted   EPS ($)

-14.86

2.93

4.57

4.78

3.19

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. On a sequential basis, revenue has improved and earnings have declined.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   billions

4.16

4.61

4.48

4.42

4.51

Diluted   EPS ($)

0.68

0.80

0.74

0.86

0.79

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Freeport-McMoRan expects demand for copper to increase 3.20 percent on an annual basis through 2015. Therefore, trends might support the industry. However, this also seems a bit optimistic. A lot depends on emerging markets, but China is slowing, and China is a major factor. Europe also remains bleak. Furthermore, it’s now evident that the gold trade has run out of momentum. And those thinking that gold will be a safe hedge in a deflationary environment (if and when there is massive deleveraging) are going to get slaughtered. Gold is NOT a safe play in a deflationary environment. That said, it’s very possible that the powers that be will continue to think of creative ways to keep the current charade going.

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Conclusion

If Freeport-McMoRan’s risky bets in oil and natural gas pay off and the economy holds its own for several more years (a possibility), then Freeport-McMoRan is a bargain here. However, too much would need to go right, which makes this a high-risk play. Most analysts love Freeport-McMoRan, so this is going against the grain, but based on industry headwinds, the stock’s poor performance in a bull market, and the stock’s extreme sensitivity to steep market corrections, Freeport-McMoRan is a STAY AWAY. Those looking for quality dividend plays can find much safer options.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am short technology, financials, the Russell 2000, and the euro.