Will Molycorp Continue Plunging?

With shares of Molycorp (NYSE:MCP) trading at around $5.22, is MCP 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

Molycorp has been one of the worst performing stocks throughout the broader market over the past three months. It was rated a STAY AWAY here several months ago. However, has the stock now been hammered enough to present an opportunity?

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Molycorp, Inc. produces and sells rare earth and rare metal materials in the United States and internationally. This is an incredibly weak industry at the moment. Here are just a few negatives for Molycorp:

  • Decline in rare earth prices
  • Weak economy has led to decreased demand
  • Lack of potential catalysts to send stock higher
  • Disappointing earnings report
  • Revenue and cash projections for the first half of 2013 have been reduced
  • Supply glut
  • Company relying on loans and secondary stock offerings to survive

The picture isn’t bright. However, there has been consistent insider buying over the past year. Insiders aren’t always correct, but they’re correct a lot more often than they’re incorrect. Insiders sell for a variety of reasons, but they only buy for one reason, which is that they think the stock is undervalued.

As far as buying because a stock is low, that’s a loser’s game. Stocks that are trading at or near their 52-week lows often continue to trend lower. If an investor is attempting to pick bottoms, then that investor should at least consider waiting until the selling is exhausted and the stock trades sideways for several months.

The chart below compares fundamentals for Molycorp, Avalon Rare Metals (AMEX:AVL), and Rare Elemental Resources (AMEX:REE). These three companies differ in size. Molycorp has a market cap of $974.94 million, Avalon has a market cap of $105.69 million, and Rare Elemental Resources has a market cap of $93.94 million.

MCP

AVL

REE

Trailing   P/E

N/A

N/A

N/A

Forward   P/E

16.68

N/A

N/A

Profit   Margin

-85.00%

N/A

N/A

ROE

-42.40%

-8.78%

N/A

Operating   Cash Flow

 -$89.64 Billion

-$5.56 Million

-$24.79 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

69.80%

N/A

1.90%

 

The fundamentals above leave a lot to be desired. The short position is also downright scary. Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Molycorp is weaker than the industry average of 0.40, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

MCP

0.98

$227.79 Million

$1.23 Billion

AVL

0.00

$25.54 Million

$0

REE

0.00

$47.36 Million

$0

 

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T = Technicals Are Weak  

Molycorp climbed to its peak in short order after its IPO, but it was even more in a hurry to get back down the mountain. The past year has been atrocious. This has been an industry-wide trend.

1 Month

Year-To-Date

1 Year

3 Year

MCP

-11.11%

-45.76%

-84.57%

N/A

AVL

-4.72%

-25.74%

-64.56%

-59.76%

REE

1.97%

-39.12%

-64.62%

-43.11%

 

At $5.22, Molycorp is trading well below all its averages.

50-Day   SMA

6.59

100-Day   SMA

7.79

200-Day   SMA

11.00

 

E = Earnings Have Been Poor          

Aside from consistent insider buying, the one positive that can be taken from this story is a consistent increase in revenue. This indicates that there is hope. On the other hand, earnings have been poor on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

2.14

7.09

35.16

396.83

528.91

Diluted   EPS ($)

-0.36

-0.72

-0.81

1.27

-4.31

 

When we look at the last quarter on a year-over-year basis, we see a slight improvement in revenue, but a significant decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

132.90

84.47

104.58

205.60

134.26

Diluted   EPS ($)

0.29

-0.07

-0.71

-0.19

-3.34

 

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 Do Not Support the Industry

This is one of the weakest industries in existence at the moment. While this won’t be the case forever, there are no signs of improvement in the near future.

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Conclusion

There are two positives here, which include consistent insider buying and top-line growth, but that isn’t nearly enough to offset the negatives. This is still an ugly situation at the moment.

Molycorp is a STAY AWAY.

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