The recent rebound in the prices of copper and gold is good news for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) which got 64% of its revenue in 2013 from copper and 14% from gold. Since the low prices at the beginning of June, copper and gold prices have already gained about 8%. FCX has compelling valuation metrics and very strong earnings growth prospects, and in this article, I will explain why, in my opinion, FCX is a smart long-term investment in a good-yielding stock.
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.
The table below presents the valuation metrics of FCX, the data were taken from Yahoo Finance and finviz.com.
Freeport-McMoRan's valuation metrics are extremely advantageous; the trailing P/E is low at 15.81 and the enterprise value-to-EBITDA ratio is very low at 7.23. According Yahoo Finance, FCX's next financial year forward P/E is very low at 13.63 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 0.49, 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. Average realized prices for first-quarter 2014 were $3.14 per pound for copper (compared with $3.51 per pound in first-quarter 2013), $1,300 per ounce for gold (compared with $1,606 per ounce in first-quarter 2013) and $93.76 per barrel for oil (net of $4.86 per barrel associated with payments on derivative contracts).
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.
Next Quarter Results
FCX will report its second-quarter 2014 financial results on July 23. FCX is expected to post a profit of $0.49 a share, a 123% rise from the company's actual earnings for the same quarter a year ago.
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 pretty high at 3.23%, and the payout ratio is at 51.2%. The annual rate of dividend growth over the past three years was very high at 26.0%, and over the past five years, was very high at 26.8%, and over the past ten years, was also very high at 32.5%.
Source: Charles Schwab
Some financial websites like Yahoo Finance and finviz.com show a payout ratio of 92%, but this ratio is taking into account 2013's special dividend. My calculation, based on forward annual dividend payment of $1.25 and EPS ttm of $2.44, gives a payout ratio of 51.2%. Considering this payout ratio, I believe that the FCX's dividend payment is sustainable.
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.
The charts below give some technical analysis information.
The FCX stock price is 6.91% above its 20-day simple moving average, 10.14% above its 50-day simple moving average and 13.51% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.52 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 67.32 approaching overbought conditions.
According to Portfolio123's "All-Stars: Buffett" powerful ranking system FCX's stock is ranked first among all S&P 500 stocks yielding more than 3%.
The "All-Stars: Buffett" ranking system is based on investing principles of the well-known investor Warren Buffett. The ranking system is quite complex, and it takes into account many factors like book value growth, operational P/E, price to book value, trailing P/E, price to tangible book value, price to cash flow and EPS stability, as shown in Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
Many analysts are covering the stock, and most of them recommend the stock. Among the 21 analysts, five rate it as a strong buy, nine rate it as a buy, six rate it as a hold, and one analysts rates it as sell.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering FCX stock, there are only two analysts who have the four or five star rating, and both of them recommend the stock.
In a report published on June 13, Morgan Stanley analyst Paretosh Misra reiterated an Overweight rating and $43.00 price target on FCX. In the report, Mr. Misra noted,
FCX shares have lagged copper peers by ~12 pct. pts. YTD, pricing an overly bearish view. We think FCX will share smelter capex costs with partners, the CoW should lower export duty impact, and divestment may mitigate risk to contract renewal.
FCX's stock has underperformed the market in the last years. Since the beginning of the year, FCX's stock has gained only 2.6%, while the S&P 500 index has increased 6.4%, and the Nasdaq Composite Index has risen 5.7%. Moreover, since the start of 2013, FCX's stock has gained only 16.6%, while the S&P 500 index has increased 38.0%, and the Nasdaq Composite Index has risen 46.2%.
FCX has recently reached a memorandum of understanding with Indonesia's government to resolve its export tax dispute and is on its way toward being able to ship ore again from its Grasberg mine. This development is very important to the company, since about 20% of its sales come from Indonesia.
Copper is the main product of the company, and accounted for 64% of sales in 2013.The price of copper rallied in recent weeks in New York trade due to drop in inventories, strong manufacturing numbers out of China, the world's largest consumer of copper, and expectations of an acceleration in the U.S. economic recovery. Inventories at warehouses managed by the LME and those in New York and Shanghai fell to a six-year low, and down 50% in 2014. From its low of $3.0155 per pound on June 06, copper price has gained 8.4% to $3.269 per pound on July 12. According to the International Copper Study Group's publication from June 23, the global refined copper market swung to a surprise shortage in March and a 205,000 tonnes deficit for the first three months of the year, compared with a 206,000 tonnes surplus in the same period in 2013.
Copper September 2014 leading contract
Chart: TradeStation Group, Inc.
Gold accounted for 14% of sales in 2013. Gold price also recovered recently; from its low of $1,244 per ounce on June 02, gold price has gained 7.5% to $1,337.4 per ounce on July 12.
Gold August 2014 leading contract
Chart: TradeStation Group, Inc.
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.
Freeport-McMoRan will benefit from a rebound in the price of copper and gold. Furthermore, by expanding its business also to oil and natural gas production, FCX is decreasing its exposure to copper and gold price volatility. FCX has compelling valuation metrics and very strong earnings growth prospects; its PEG ratio is extremely low at 0.49, one of the lowest among S&P 500 companies. Moreover, FCX's stock is ranked first among all S&P 500 stocks yielding more than 3% according to Portfolio123's "All-Stars: Buffett" powerful ranking system.
All these factors lead me to the conclusion that FCX stock is a smart investment right now. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.