Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * earnings per share * book value per share), which for Freeport-McMoRan gives us a fair price of $24.93. In comparison, the stock’s market price is $40.31 per share. Therefore, Freeport-McMoRan’s market price exceeds the upper bound that a prudent investor would pay for its shares by 61.7%.
The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis also touches on the following points:
Sales Revenue Should Be No Less Than $100 million.
For Freeport-McMoRan, average sales revenue over the last few years has been $17,518,250,000.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Freeport-McMoRan's current ratio by dividing its total current assets of $14,830,000,000.00 by its total current liabilities of $5,892,000,000.00. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Freeport-McMoRan’s case, current assets outweigh current liabilities by a factor of 2.5.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Freeport-McMoRan’s debt ratio is 1.0, the company has an average amount of debt. We calculate Freeport-McMoRan’s debt to net current assets ratio by dividing its total long term of debt of $9,078,000,000.00 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
Freeport-McMoRan negative retained earnings in 2008, 2009, 2010, 2015, 2016, 2017, 2018, 2019, 2020, and 2021, during which time they averaged $-6,870,107,142.86. Retained earnings are the net income that accumulates in (or gets drained from) the company in each reported period. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Freeport-McMoRan has offered regular dividends since 2002, and they have returned a 1.5% yield over the last 12 months.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
We are going to compare Freeport-McMoRan's earnings per share averages from the two 'bookends' of the 12 period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose Eps values of $7.50, $-14.86, and $2.93, which give us average out to $-1.00. Next we look at the years $-0.17, $0.41, and $2.90, which average out to $1.00. The growth rate between the two averages does not meet Graham's standard since it is -200%.
Freeport-McMoRan does not have the profile of a defensive stock according to Benjamin Graham's criteria because in addition to trading far above its fair value, it has:
- impressive sales revenue
- an excellent current ratio
- an average amount of debt
- an excellent current ratio
- negative retained earnings in most years
- a decent dividend record
- decreasing earnings per share
