A Mining Stock That Is Undervalued
The recent move towards austerity in the United States has left many investors confused about where to invest. All of the talk in Washington over the past few months has been about tightening up the federal budget and reducing spending in the nation’s capital. There are many plans being discussed by Congress which will have a significant impact on the U.S. economy. Many investors are starting to flee the bond market over fears that the United States may default on some of its financial obligations. Fortunately, there are some asset classes that may thrive from investors leaving the bond market. Let’s take a look at one stock that should benefit from the panic.
Freeport McMoran (FCX)
During turbulent economic times, investors turn to the safe haven of precious metals. Investors bid up tangible assets whenever there are concerns over the pricing of the United States Dollar. Freeport McMoran is a prime position to benefit as the company is one of the largest miners and producers of mineral resources. Freeport’s primary focus is on the sale of copper with the miner selling over 4 billon pounds of copper annually. Copper is a needed asset as it is used in the construction of automobiles, buildings, pipes, and most appliances.
Freeport McMoran’s stock has performed well over the past year with the company splitting its shares in February of this year. Recently, shares of Freeport McMoran have taken a dip. The stock was down 10.5% this past week as copper prices plunged 5.8% over the past week. There are concerns that demand in the Asian continent may wane since China is cutting back on its copper purchases. These concerns appear unfounded as several industry reports have indicated that demand for copper will outpace supply for 2011 and 2012. Goldman Sachs expects near term weakness for commodities but expects long term demand to be quite high.
Is This A Value Stock?
It appears that some individuals are trimming their positions in the commodities space. Investors can use the recent weakness to start building a position in Freeport McMoran. Let’s look at some of the fundamentals surrounding Freeport McMoran. Freeport currently trades at 8.8 times the current year’s earnings and 8.5 times next year’s earnings. Freeport trades at 3.9 times book value, 2.4 times sales, and 16 times the company’s free cash flow. The company is in the enviable position of being the largest supplier of copper at a time when long term demand is high and supply is constricting.
Gross margins and operating margins are high coming in at 50.5% and 47.7% respectively. Return on equity is a robust 45% and return on assets is 15.4%. Freeport is incredibly sensitive to the price of copper since it generates 78% of its revenue from copper. Only 12% of its revenues come from gold and 6% from molybdenum.
Freeport has a good dividend yield for a mining cup with the stock yielding just below 2% and paying investors $1 a share. A special dividend was declared before February’s stock split. The current payout is just 17% of this year’s earnings per share projection. There is substantial room for continued dividend increases. Freeport has done a great job of increasing free cash flow over the past few years through operating income growth and acquisitions like Phelps Dodge. Freeport McMoran has increased free cash flow from $622 million in 2008 to $4.8 billion last year. Freeport has $3.7 billion dollars in cash on the balance sheet.
Freeport is an attractive stock to me at the current $50 level. Investors are getting an opportunity to own a piece of a great long term business at a discounted price.