The Market Is Betting Big on FCX - What's the Catch?

Freeport-McMoRan (FCX) stock climbed 6.6 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Freeport-McMoRan's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.

Freeport-McMoRan Inc. engages in the mining of mineral properties in North America, South America, and Indonesia. The large-cap Basic Materials company is based in Phoenix, United States and has 24,700 full time employees.

FCX Has a Higher P/E Ratio Than the Sector Average

Compared to the Basic Materials sector's average of 8.57, Freeport-McMoRan has a trailing twelve month price to earnings (P/E) ratio of 16.3 and an expected P/E ratio of 23.7. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $2.61 or forward earnings per share of $1.79.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Freeport-McMoRan's P/E ratio is higher than its sector average of 8.57, we can deduce that the market is overvaluing the company's earnings.

FCX Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Freeport-McMoRan's P/B ratio of 4.1 is higher than its sector average of 1.86, such a margin of safety does not exist for the stock.

FCX Is Generating Cash

Freeport-McMoRan has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 129.6%, compared to -9.1% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 310.3% and a coefficient of variability of 188.7%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 7,715 -2,115 5,600 430.3
2020-12-31 3,017 -1,961 1,056 190.26
2019-12-31 1,482 -2,652 -1,170 n/a

Freeport-McMoRan's Is a Profitable Business

If you are looking to make FCX a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Freeport-McMoRan is run.

Freeport-McMoRan's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 22,845 14,030 38.59 115.47
2020-12-31 14,198 11,655 17.91 98.78
2019-12-31 14,402 13,105 9.01 n/a

Freeport-McMoRan's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 22,845 529 36.27 162.26
2020-12-31 14,198 579 13.83 195.51
2019-12-31 14,402 623 4.68 n/a

Freeport-McMoRan's cost of revenue is growing at a rate of 4.7% in contrast to -7.8% for operating expenses. Sales revenues, on the other hand, have experienced a 29.7% growth rate. As a result, the average gross margins growth is 107.1 and the average operating margins growth rate is 178.9, with coefficients of variability of 69.5% and 89.0% respectively.

We See Mixed Market Signals Regarding FCX

Freeport-McMoRan has an average rating of buy and target prices ranging from $55 to $23. At its current price of $42.48, the company is trading 8.78% away from its target price of $39.05. 1.9% of the company's shares are linked to short positions, and 79.2% of the shares are owned by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 116,091,834 2022-09-29 8% $4,933,322,361
Blackrock Inc. 110,475,229 2022-09-29 8% $4,694,644,738
FMR, LLC 99,394,132 2022-09-29 7% $4,223,753,533
Capital Research Global Investors 71,186,813 2022-09-29 5% $3,025,083,542
State Street Corporation 64,013,879 2022-09-29 4% $2,720,269,719
Fisher Asset Management, LLC 53,167,066 2022-09-29 4% $2,259,334,412
JP Morgan Chase & Company 36,516,129 2022-09-29 3% $1,551,752,862
Geode Capital Management, LLC 25,157,510 2022-09-29 2% $1,069,068,360
Northern Trust Corporation 18,859,206 2022-09-29 1% $801,421,938
Bank Of New York Mellon Corporation 18,433,904 2022-09-29 1% $783,348,730
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.