Freeport-McMoRan: China Concerns Are Overblown

Mar.10.14 | About: Freeport-McMoRan Inc. (FCX)

Summary

Weak Chinese export data has spooked the metals market.

Exports were hurt by weather and holidays; imports, a better internal indicator, remain robust.

With low inflation, China can stimulate if needed.

Infrastructure needs in the developed, and emerging markets will benefit copper.

At 9x earnings, Freeport is irrationally cheap and is a buy here.

Freeport-McMoRan (NYSE:FCX) shares dropped over 3% early Monday as weak China trade data hurt metal prices and stocks. While this data has made some investors suggest a long-predicted slowdown in Chinese economic activity is imminent, that is an overly pessimistic view of the situation. Further, the long-run supply/demand fundamentals in Freeport's core businesses are strong. Investors would be wise to use this pullback to buy, not sell, FCX.

Over the weekend, China released its trade data, and exports were down 18% year over year in February compared to estimates of up 7% (details available here). Inflation also dropped to 2%, well below the central bank's 3.5% target. This data has been seen as evidence the Chinese economy faces problems. However, exports are a better indicator for external economic activity, not China's economic prowess. China can only export what other nations are willing to buy.

U.S. retail activity was hurt last month, as bad weather left stores closed and some consumers snowed in. This phenomenon likely put downward pressure on China's exports. Moreover, China's Lunar New Year is a state holiday that cuts production and can push exports back a month. Given the fact January exports were up a strong 10.6%, it is likely that the export drop was a one-month event, impacted by unique factors that will recede in March.

Moreover until last year, China had been fighting inflation as high prices can lead to domestic discontent. China appears to have won its fight against inflation, and there is now room for inflation to move higher before reaching the 3.5% target. This cushion provides the central bank with the ability to loosen monetary policy should the economy face headwinds going forward. This will help to negate any downturn, and China will be able to support growth of at least 7% this year. I would expect a figure closer to 7.5%.

While the export demand was weak, China's internal consumption remains strong, with imports jumping a solid 10.1%. Imports are much more indicative of China's internal economic health than exports are, and this number shows China's demand remains strong. With a growing middle class and continued investment in infrastructure, China will continue to be a major consumer of copper and other commodities. While China may not be growing as fast as it was 10 years ago, reports of its demise are premature and greatly exaggerated.

With every passing day, there is less copper in the ground, but the world will continue to be a major consumer of copper as emerging markets build out infrastructure and telecommunications. Moreover, the age of austerity in the West has caused governments to underinvest in infrastructure, and they will have to spend over $57 billion to modernize. This is supportive of copper, steel, and other commodity prices. Copper will benefit from growing demand out of emerging markets, and eventually developed economies will no longer be able to defer critical investments in infrastructure, which is fantastic for copper demand.

The Chinese export data does not change the long-term bull thesis underpinning Freeport, which now yields over 4%. China is not collapsing, and global growth should be better in 2014 than 2013. With stronger growth and continued infrastructure requirements, copper should remain in high demand. This year, FCX should earn about $3.50, and shares are currently trading at less than 9x earnings. With diversified low cost reserves that will last over 30 years, Freeport's asset base will drive stronger earnings and cash flow for years to come. At current prices, Freeport is far too cheap. Investors would be wise to add or get long here.

Disclosure: I am long FCX. 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.