Why Freeport-McMoRan's Stock Is A Long-Term Investment Opportunity Right Now

Apr.27.14 | About: Freeport-McMoRan Inc. (FCX)

Summary

After the retreat in its stock price, it is now an excellent opportunity for a long-term investment in FCX at a cheap price.

FCX’s PEG ratio of 0.39 is one of the lowest among S&P 500 companies.

FCX’s average annual earnings growth estimates for the next five years is extremely high at 27.90%.

FCX’s forward annual dividend yield is quite high at 3.68%.

FCX beat EPS expectations by 11.6% in its latest quarter.

After beating analysts' expectations by 11.6% in its first-quarter 2014 earnings report, Freeport-McMoRan Copper & Gold Inc.'s (NYSE:FCX) stock has shown some small gain. Freeport-McMoRan's stock price has significantly declined since the beginning of the year, as copper and gold prices dropped, but it is now showing some strength, gaining 11% since March 13. However, I consider FCX's stock as a good combination of value and growth in a high-yielding dividend stock, and in my opinion, after the retreat in its stock price, it is now an excellent opportunity for a long-term investment in a good company at a cheap price.

The Company

Freeport-McMoRan Copper & Gold is the world's second largest copper producer and a major producer of gold and molybdenum. The company is also a small oil and gas producer in the U.S. Freeport-McMoRan has mines in Indonesia, North America, South America and Africa. The company was founded in 1987 and is headquartered in Phoenix, Arizona.

Valuation Metrics

The table below presents the valuation metrics of FCX, and the data were taken from Yahoo Finance and finviz.com.

Freeport-McMoRan's valuation metrics are extremely advantageous; the trailing P/E is very low at 12.93 and the enterprise value-to-EBITDA ratio is also very low at 6.66. According to finviz.com, FCX's next financial year forward P/E is very low at 10.99, and the average annual earnings growth estimates for the next five years is very high at 27.90%. These give an exceptionally low PEG ratio of 0.39, one of the lowest among S&P 500 companies. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio, because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On April 24, Freeport-McMoRan reported its first-quarter 2014 financial results, which beat EPS expectations by $0.05 (11.6%).

Net income attributable to common stock totaled $510 million, $0.49 per share, for first-quarter 2014, compared with net income of $648 million, $0.68 per share, for first-quarter 2013. Sales climbed to $4.99 billion from $4.58 billion. Consolidated sales for first-quarter 2014 totaled 871 million pounds of copper, 187 thousand ounces of gold, 27 million pounds of molybdenum and 16.1 million barrels of oil equivalents, compared with 954 million pounds of copper, 214 thousand ounces of gold and 25 million pounds of molybdenum for first-quarter 2013.

In the report, chief officers of the company said:

Our first-quarter results reflect solid operating performance in our North America, South America and Africa mining operations and a meaningful contribution from our oil and gas business, partly offset by the effects of reduced output from Indonesia and lower copper prices. We are actively engaged in reaching a resolution to enable resumption of copper concentrate exports in Indonesia. We are pleased to report substantial progress in advancing projects to increase production and cash flows from our mining and oil and gas projects and remain focused on strong execution of these value enhancing initiatives. Our large and diverse portfolio of assets and resources provide attractive near-term and longer-term growth opportunities that will enable us to increase values for shareholders by providing exposure to markets with attractive long-term fundamentals, effective management of our base operations, prudent capital management, achievement of our debt reduction initiatives and providing attractive cash returns to shareholders.

Dividend

During 2013, FCX paid $2.3 billion in common stock dividends, including $1.0 billion for a supplemental dividend of $1 per share paid on July 1, 2013. FCX has a long-standing tradition of seeking to build shareholder value through investing in projects with attractive rates of return and returning cash to shareholders through common stock dividends and share purchases. FCX paid common stock dividends of $326 million in first-quarter 2014. FCX started paying dividends in 1995, but had interrupted the payments during the years 1999 to 2002 and in 2009. The forward annual dividend yield is high at 3.68%, and the payout ratio is at 85%. The annual rate of dividend growth over the past three years was very high at 26.0%, and over the past five years was also very high at 26.8%.

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Source: Charles Schwab

Competitors and Group Comparison

A comparison of key fundamental data between Freeport-McMoRan and its main competitors is shown in the table below.

Source: Yahoo Finance, finviz.com

FCX's valuation metrics are much better than those of its main competitors. FCX has the strongest earnings growth prospects, the lowest forward P/E ratio, and by far the lowest PEG ratio among the group.

FCX's margins have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

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Source: Portfolio123

Technical Analysis

Personally, I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decision-making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.

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Chart: finviz.com

The FCX stock price is 3.01% above its 20-day simple moving average, 4.71% above its 50-day simple moving average and 4.04% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at 0.06 and ascending, which is a very bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 52.84, which does not indicate oversold or overbought conditions.

Discussion

Copper is the main product of the company, and accounted for 64% of sales in 2013. The average realized price for copper fell from $3.51 per pound in the first quarter of 2013 to $3.14 per pound in the first quarter of 2014, a decline of 10.5%.

Although the London Metal Exchange's copper inventories have declined recently, the price of copper has continued to drop, as shown in chart below. The decline in copper price is due to a significant increase in global copper supply and weaker demand in China, the world's largest consumer of copper, where recent industrial production and GDP growth have been weaker than expected.

Copper July 2014 Contract

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Chart: TradeStation Group, Inc.

According to Reuters' publication of April 23, China's state stockpiler has bought at least 200,000 tonnes of imported copper stored in bonded warehouses after global copper prices dove to multi-year lows in March. Further purchases by China's State Reserves Bureau could help absorb the small surplus forecast to weigh on the global refined copper market this year and help support prices that have already dropped nearly 10 percent so far this year.

Gold accounted for 14% of sales in 2013. The average realized price for gold fell from $1,606 per ounce in the first quarter of 2013 to $1,300 per ounce in the first quarter of 2014, a decline of 19%. Gold price has started to improve recently, and it has surged about 7% from the beginning of the year to $1,301 per ounce on April 25, 2014.

Gold June-2014 Contract

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Chart: TradeStation Group, Inc.

First-quarter 2014 consolidated copper sales of 871 million pounds were lower than first-quarter 2013 sales of 954 million pounds and the January 2014 estimate of 1.0 billion pounds. First-quarter 2014 consolidated gold sales of 187 thousand ounces were lower than first-quarter 2013 sales of 214 thousand ounces, and the January 2014 estimate of 325 thousand ounces. Lower copper and gold sales volumes primarily reflected lower volumes from PT-FI because of the post-January 12, 2014, restrictions on concentrate exports from Indonesia, which resulted in a deferral of approximately 125 million pounds of copper and 140 thousand ounces of gold in first-quarter 2014. FCX is working with the Indonesian government to reach a resolution that would enable PT-FI to resume exports of concentrates.

With the acquisition of Plains Exploration & Production (NYSE:PXP) and McMoran Exploration (NYSE:MMR) in June 2013, FCX is now also a small oil and gas producer in the U.S. First-quarter 2014 sales from oil and gas operations of 16.1 MMBOE, including 11.8 million barrels of crude oil, 19.5 billion cubic feet of natural gas and 1.1 MMBbls of natural gas liquids, were higher than the January 2014 estimate of 15.3 MMBOE, primarily reflecting higher Eagle Ford production volumes, continued strong performance in the Gulf of Mexico and stable production from California.

Molybdenum accounted for 4% of sales in 2013. Demand for molybdenum depends mostly on the level of global steel production. First-quarter 2014 consolidated molybdenum sales of 27 million pounds were higher than first-quarter 2013 and the January 2014 estimate of 25 million pounds.

My Take

In my opinion, copper price is ready to improve due to declining LME inventories and improvement in the U.S. housing market. Furthermore, Freeport-McMoRan is succeeding to reduce the cost of copper production; net cash costs for copper were $1.54 per pound in 1Q14, down 2% from $1.57 per pound in the prior-year quarter due to cost-control efforts. Gold price has already increased 7% this year, and it is in an uptrend. Regarding oil and natural gas, I don't see a significant decline in price in the coming months. As a result, FCX will benefit from better prices for copper and gold and lower cost of copper production.

Risk

Declines in the market prices of copper, gold and/or oil could adversely affect the company's earnings, cash flows and asset values and, if sustained, could adversely affect its ability to repay debt. Fluctuations in the market prices of copper, gold or oil can cause significant volatility in the company's financial performance and adversely affect the trading prices of its debt and common stock.

Conclusion

Freeport-McMoRan has compelling valuation metrics and very strong earnings growth prospects; its PEG ratio is extremely low at 0.39, one of the lowest among S&P 500 companies. Furthermore, by expanding its business also to oil and natural gas production, FCX is decreasing its exposure to copper and gold prices volatility.

All these factors lead me to the conclusion that FCX's stock is a smart investment right now. Furthermore, the very rich growing dividend represents a gratifying income.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over 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.