Is Freeport-McMoRan Stock Overpriced Post Rally?

Industrial Metals & Mining company Freeport-McMoRan is standing out today, surging to $53.82 and marking a 3.4% change. In comparison the S&P 500 moved only 0.0%.

FCX currently sits within range of its analyst target price of $53.68, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Freeport-McMoRan shares have outperformed the S&P 500 by 19.3%, with a price change of 45.6%.

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 47.2, based on its trailing EPS of $1.14. The company has a forward P/E ratio of 24.6 according to its forward EPS of $2.19 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the basic materials sector has an average P/E ratio of 16.53, and the average for the S&P 500 is 15.97.

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Freeport-McMoRan's PEG ratio of 1.24 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Freeport-McMoRan's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 5,279,000 4,824,000 455,000 -72.75
2022 5,139,000 3,469,000 1,670,000 -70.18
2021 7,715,000 2,115,000 5,600,000 430.3
2020 3,017,000 1,961,000 1,056,000 190.26
2019 1,482,000 2,652,000 -1,170,000 -161.84
2018 3,863,000 1,971,000 1,892,000
  • Average free cash flow: $1.58 Billion
  • Average free cash flown growth rate: 4.7 %
  • Coefficient of variability (the lower the better): 0.0 %

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 1.2% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Freeport-McMoRan's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Basic Materials sector, which stands at 2.07 as of the first quarter of 2023.

With a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with a flat trend, we can conclude that Freeport-McMoRan is probably undervalued at current prices. The stock presents poor growth indicators because of its decent operating margins with a positive growth rate, and an inflated PEG ratio.

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.