FreeportMcMoRan (NYSE:FCX) is among the leading basic material producers around the world. Established in 1987, the Phoenix, Arizonaheadquartered company has grown into a diversified mining giant. FreeportMcMoRan has interests in several mines spread around the world. As of the last quarter, the company reported recoverable and probable reserves of 120 billion pounds of copper, 34 million ounce of gold, 3.4 billion pounds of molybdenum, and 330 million ounces of silver. However, the oversupply concerns in the copper market have negatively affected the investor sentiment. While FCX was able to boost its earnings by 4.5% in this year, the stock lost almost 25% in the last 12 months.
As of the time of writing, FreeportMcMoRan stock was trading at $38.56 with a 52week range of $28.85  $58.75. It has a market cap of $36.8 billion. Trailing twelve month P/E ratio is 8.08, and forward P/E ratio is 7.3. P/B, P/S, and P/CF ratios stand at 2.4, 1.8, and 5.6, respectively. Operating margin is 43.4% and net profit margin is 27.5%. The company has a clean balance sheet with low debt. Debt/equity ratio is 0.23. FreeportMcMoRan is an okay dividend payer. Based on an annual dividend of $1.5, trailing yield is 3.8%.
FreeportMcMoRan has a 3star rating from Morningstar. Out of 7 analysts covering the company, 6 have buy, and 1 has hold rating. Wall Street has diverse opinion about the company's future. Average fiveyear annualized growth forecast estimate is 5%. Given the company's past growth rate of 7.5%, this is an attainable target.
What is the fair value of FreeportMcMoRan given the forecast estimates? We can estimate FreeportMcMoRan's fair value using discounted earnings plus equity model as follows.
Discounted Earnings Plus Equity Model
This model is primarily used for estimating the returns from longterm projects. It is also frequently used to price fairvalued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:
V = E_{0} + E_{1} /(1+r) + E_{2} /(1+r)^{2} + E_{3}/(1+r)^{3} + E_{4}/(1+r)^{4} + E_{5}/(1+r)^{5} + Disposal Value
V = E_{0} + E_{0} (1+g)/(1+r) + E_{0}(1+g)^{2}/(1+r)^{2} + â€¦ + E_{0}(1+g)^{5}/(1+r)^{5} + E_{0}(1+g)^{5}/[r(1+r)^{5}]
The earnings after the last period act as a perpetuity that creates regular earnings:
Disposal Value = D = E_{0}(1+g)^{5}/[r(1+r)^{5}] = E_{5} / r
While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the currentperiod earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my growth estimates. You can set these parameters as you wish, according to your own diligence.
Valuation
Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate. In order to smooth the results, I will also take the average of ttm EPS along with the mean EPS estimate for the next year.
E_{0} = EPS = ($4.77 + $5.39) / 2 = $5.08
Wall Street holds diversified opinions on the company's future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average fiveyear growth forecast is 5%. Book value per share is $16.50. The rest is as follows:
Fair Value Estimator  
V (t=0) 
E_{0} 
$5.08 
V (t=1) 
E_{0} (1+g)/(1+r) 
$4.81 
V (t=2) 
E_{0}((1+g)/(1+r))^{2} 
$4.55 
V (t=3) 
E_{0}((1+g)/(1+r))^{3} 
$4.30 
V (t=4) 
E_{0}((1+g)/(1+r))^{4} 
$4.07 
V (t=5) 
E_{0}((1+g)/(1+r))^{5} 
$3.85 
Disposal Value 
E_{0}(1+g)^{5}/[r(1+r)^{5}] 
$34.98 
Book Value 
BV 
$16.50 
Fair Value Range 
Lower Boundary 
$62 
Upper Boundary 
$78 

Minimum Potential 
60% 

Maximum Potential 
103% 
I decided to add the book value per share so that we can distinguish between a lowdebt and debtloaded company. The lower boundary does not include the book value. According to my 5year discountedearningsplusbookvalue model, the fairvalue range for FreeportMcMoRan is between $62 and $78 per share. At a price of $38.4, FreeportMcMoRan is trading at a significant discount. The stock has at least 60% upside potential to reach its fair value.
Peer Performance
While there are several companies in the copper business, Southern Copper (NYSE:SCCO) is probably the closest competititor of FreeportMcMoRan. Southern Copper returned 6.16% in this year, but similar to FCX, the stock's annual return is in the red territory. Southern Copper has a richer valuation, as its stock is trading at double digit P/E ratios. However, with a yield of 6.43%, it offers a much better dividend income. That is probably the reason why Southern Copper is priced with a relatively lower discount.
Based on an EPS growth estimate of 8.7%, Southern Copper has a fair value range of $38  $43. It is also cheap, but FreeportMcMoRan is trading at a deeper discount compared to Southern Copper.
From a technical perspective, FreeportMcMoRan has recently broken a narrowtriangle formation. At the current valuation, it is trading near the middle of its 52week range. The stock started the new year with strong bullish momentum, but it could not stay above $42, and retreated. The relative strength index of 34 suggests that the stock is trading near the oversold territory. Those, who trade on technical indicators, should look for the stock's behavior around $42, as this price is a strong local resistance point.
Summary
Based on the historical valuation metrics, FreeportMcMoRan is trading at a discount. The trailing P/E ratio of 8.1 and P/B ratio of 2.3 are significantly lower than the 5year average P/E ratio of 12.1, and P/B ratio of 3.9. Compared to the market's forward P/E ratio of 13.4, FCX is significantly undervalued. The stock looks like a deep bargain as it is trading with a forward P/E of 7.3.
Based on my FED+ valuation, FCX is undervalued by almost 40%. The stock has at least 60% upside potential to reach its fair valuation range. Analysts also agree with me. While not as bullish as the model suggests, their target price of $55.77 suggest almost 50% upside potential. Note that, similar to other commodity producers, FreeportMcMoRan's future growth is determined by its primary commodity output. If copper prices collapse, then FCX might also suffer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.