One of Wall Street's biggest winners of the day is Freeport-McMoRan, a industrial metals & mining company whose shares have climbed 3.1% to a price of $41.24 -- 9.88% below its average analyst target price of $45.76.
The average analyst rating for the stock is buy. FCX outperformed the S&P 500 index by 3.0% during today's afternoon session, and by 3058.0% over the last year with a return of 4673.5%.
Freeport-McMoRan Inc. engages in the mining of mineral properties in North America, South America, and Indonesia. The company belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.
Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles — but accurately predicting where we are presently in the economic cycle is a matter of intense debate.
Freeport-McMoRan's trailing 12 month P/E ratio is 22.3, based on its trailing EPS of $1.85. The company has a forward P/E ratio of 19.1 according to its forward EPS of $2.16 -- which is an estimate of what its earnings will look like in the next quarter.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US basic materials companies is 10.03, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Freeport-McMoRan's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -2.37. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing FCX's growth potential .
To better understand the strength of Freeport-McMoRan's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
FCX's gross profit margins have averaged 24.8% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are increasing strongly based on their four year average gross profit growth rate of 39.1%. Freeport-McMoRan's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 5,139,000 | -3,469,000 | 1,670,000 | -70.18 |
| 2021-12-31 | 7,715,000 | -2,115,000 | 5,600,000 | 430.3 |
| 2020-12-31 | 3,017,000 | -1,961,000 | 1,056,000 | 190.26 |
| 2019-12-31 | 1,482,000 | -2,652,000 | -1,170,000 | n/a |
- Average free cash flow: $1.79 Billion
- Average free cash flown growth rate: 24.8 %
- Coefficient of variability (lower numbers indicating more stability): 157.5 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FCX have received an annualized dividend yield of 1.5% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Freeport-McMoRan's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Basic Materials sector, which stands at 2.08 as of the first quarter of 2023.
With an inflated P/E ratio, an elevated P/B ratio, and generally positive cash flows with an upwards trend, we can conclude that Freeport-McMoRan is probably fairly valued at current prices. The stock presents strong growth indicators because of its average net margins with a positive growth rate, and an above average PEG ratio.
