Seadrill And Freeport-McMoRan Copper & Gold: Growth And Income, Low Valuation And Upgrades

| About: Freeport-McMoRan Inc. (FCX)

Seadrill Ltd (NYSE:SDRL) and Freeport-McMoRan Copper & Gold (NYSE:FCX), both undervalued and providing a good mix of income and growth, had received positive upgrades from analysts recently. Both stocks will be updated for their recent developments and will be analyzed fundamentally and technically. Investing strategies will also be presented.

Seadrill Ltd

Seadrill is an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry. SDRL was up 2.06% and closed at $37.58 on March 5, 2013. SDRL had been trading in the range of $31.37-$41.95 in the past 52 weeks. SDRL has a market cap of $17.63B with a high beta of 2.00.

SDRL was upgraded by research analysts at HSBC from a "neutral" rating to an "overweight" rating with a target price of NOK 255 ($44.75) on March 5, 2013. Analysts currently have a mean target price of $43.23 and a median target price of $46.00 for SDRL. Analysts are estimating an EPS of $0.60 with revenue of $1.15B for the current quarter ending in March 13, 2013. For 2013, analysts are projecting an EPS of $2.99 with revenue of $4.97B, which is 10.90% higher than 2012.

As reported on March 5, 2013, Seadrill is contemplating issuing new senior unsecured bonds in the Norwegian bond market with maturity in March 2018. The net proceeds from the Bond Issue will be used for general corporate purposes.

In Q4, 2012, Seadrill Ltd had completed IPO of Seadrill Partners (NYSE:SDLP), which was up 17.97% since its IPO. Seadrill Ltd is on track to deliver forecasted double-digit growth in distribution and identified drop-downs candidates with the long-term contracts. The management expects moderate growth and consolidated cash flow for the first three quarters in 2013. This should set us up for a material increase in cash flow for the fourth quarter. The company should achieve an annualized run rate in EBITDA of $3B.

There are a few positive factors for SDRL:

  • Higher revenue growth (3 year average) of 26.0 (vs. the industry average of -1.1)
  • Higher operating margin of 41.3% and net margin of 23.2% (vs. the industry averages of 7.2% and -0.4%)
  • Stronger ROE of 15.9 (vs. the average of -0.2)
  • Lower Forward P/E of 9.7 (vs. the S&P 500's average of 13.9)
  • SDRL currently offers an annual dividend yield of 9.15%

Technically, the MACD (12, 26, 9) indicator is showing a slightly bearish trend but could turn bullish anytime soon as the MACD difference continues to converge. The MACD Histogram is at -0.003. The momentum indicator, RSI (14), is picking up and is currently near neutral at 50.40. SDRL is approaching its 50-day MA of $37.89 and 200-day MA of $37.76, as seen from the chart below.

Click to enlarge

Source: StockCharts.com

How to Invest

SDRL is a long-term buy as it offers a great mix of income and growth. At current P/E of 18.0 and Forward P/E of 9.7, SDRL is reasonable valued. It is important to see if SDRL can break through its 50-day and 200-day MAs to determine its near-term direction. Investors can also review the following ETFs to gain exposure to SDRL:

  • FTSE Norway 30 ETF (NYSEARCA:NORW), 8.26% weighting
  • MSCI Norway Capped Investable Market Index Fund (BATS:ENOR), 8.09% weighting
  • Market Vectors Oil Services ETF (NYSEARCA:OIH), 4.47% weighting

Freeport-McMoRan Copper & Gold Inc.

FCX is a leading international mining company, operating large, long-lived, geographically diverse assets with strong reserves of copper, gold and molybdenum. FCX was up 0.45% and closed at $31.54 on March 5, 2013. FCX had been trading in the range of $30.54-$43.65 in the past 52 weeks. FCX has a market cap of $31.70B with a beta of 1.97.

On March 5, 2013, BofA/Merrill Lynch upgraded FCX from neutral to buy. Analysts currently have a mean target price of $40.21 and a median target price of $40.00 for FCX. Analysts are estimating an EPS of $0.84 with revenue of $4.83B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $4.43 with revenue of $21.60B, which is 19.90% higher than 2012.

On March 1, 2013, FCX announced the pricing of $6.5B of senior notes, as seen below:

Source: Business Wire

As reported, the sale of the senior notes is expected to settle on March 7, 2013. FCX intends to use the net proceeds from the offering, together with the net proceeds of its term loan, primarily to fund the Plains Exploration & Production Company (NYSE:PXP) and McMoRan Exploration Co. (NYSE:MMR) acquisitions, including for the payment of cash consideration for the acquisitions and the repayment of certain indebtedness of PXP. As previously announced, PXP and MMR stockholder meetings to approve the acquisitions will be held after the U.S. Securities and Exchange Commission has declared effective the respective registration statements on Form S-4 filed in connection with the acquisitions. The transactions are expected to close in second-quarter 2013.

There are a few positive factors for FCX:

  • Lower debt/equity ratio of 0.2 (vs. the industry average of 0.3)
  • Lower P/E, P/B, and P/S of 9.8, 1.7, and 1.7 (vs. the industry averages of 12.3, 2.7, and 2.4)
  • Lower Forward P/E of 7.9 (vs. the S&P 500's average of 13.9)
  • FCX generates an operating cash flow of $3.77B with a levered free cash flow of $438.62M
  • FCX currently offers an annual dividend yield of 3.96%

Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, but the MACD difference continues to converge. RSI (14) is picking up slightly but still indicating a strong bearish lean at 32.23. FCX is currently trading below its 50-day MA of $34.18 and 200-day MA of $35.26. The next support is $30.09, the S1 pivot point, followed by $28.27, the S2 pivot point, as seen from the chart below.

Click to enlarge

Source: StockCharts.com

How to Invest

FCX presents a great income play with a steady growth rate. FCX is currently undervalued compared to its peers with its low P/E of 9.8 and Forward P/E of 7.9. For bullish investors, a credit put option spread of May 18, 2013 $27/$29 put can be reviewed. Investors can also review the following ETFs to gain exposure to FCX:

  • Dow Jones U.S. Basic Materials Index (NYSEARCA:IYM), 6.87% weighting
  • Materials Select Sector SPDR (NYSEARCA:XLB), 6.83%
  • Materials ETF (NYSEARCA:VAW), 6.13%

Note: All prices are quoted from the closing of March 5, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.