The recent market dip has not been good news for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), a leading miner of copper (demand for which is often taken as an indicator of the global economy’s health) as well as gold. The stock is now down 20% year to date, and even at the beginning of 2013 its price had been on the fall after Freeport-McMoRan announced an acquisition of two oil and gas companies with an emphasis on offshore production. Investors had been concerned that the company was overdiversifying, as well as that it was overpaying for the acquisitions.
In the first quarter of 2013, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s revenues were about even with levels from a year earlier, but higher production costs contributed to earnings falling by 18%. Of course, as we’ve mentioned the company is overall highly sensitive to global macro conditions; the stock’s beta is 2.2. However, it is possible that markets have overreacted to trends in the overall economy and to Freeport-McMoRan’s acquisition- currently the stock trades at 9 times trailing earnings, and so the company could see a small decline in net income and still be fairly priced. McMoRan stands out for a dividend yield of 4.5% at current prices and dividend levels, so while it is a terrible defensive stock it may be of interest to income investors who can handle some more market risk in their portfolio.
We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can use our database to track hedge fund interest in Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). During the fourth quarter of 2012, billionaire John Paulson’s Paulson & Co. initiated a position of 9 million shares (see Paulson's stock picks). Omega Advisors, managed by billionaire Leon Cooperman, bought 3.1 million shares between October and December; Cooperman has said that he believes the oil and gas acquisitions will actually be good for the company (find more stocks Cooperman was buying).
Other miners of copper and/or gold include Newmont Mining Corp (NYSE:NEM) and Southern Copper Corp (NYSE:SCCO). Newmont is priced similarly to Freeport-McMoRan, with a trailing P/E of 9. In its most recent quarterly report, the company’s sales were down 11% compared to the fourth quarter of 2011 so once again the challenge for value investors is deciding if the stock is cheap enough to make up for what may be a decline in business. Southern Copper has been doing a bit better- in the sense that in the fourth quarter of 2012 revenue and net income were each down only 1% from their levels in Q4 2011- but the market has reacted by pricing the stock at a premium to the other two miners, with trailing and forward earnings multiples of 14 and 12 respectively. While the sell-side does expect high long term growth, we think that we would avoid it at least until we see improvement in earnings.
We can also compare Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) to Cliffs Natural Resources Inc (NYSE:CLF) and Vale SA (ADR) (NYSE:VALE), two other natural resources companies which are tied to macro demand (their betas are at least 1.5). These peers have also taken hits in the market in the last year; Cliffs is actually down over 70%. That company is actually unprofitable on a trailing basis due to writedowns, and even adjusted earnings figures have consistently been below expectations. Analyst consensus implies a forward P/E of 8, but we don’t think it’s worth watching at this time. Vale is currently trading fairly expensively in relation to recent earnings, with a trailing P/E of 17. There is a high dividend yield here as well, and the sell-side is optimistic with the stock trading at only 7 times forward earnings estimates, but it still might be best to wait for a quarter or two of results to see that the company is on target.
We haven’t been fans of Freeport-McMoRan’s acquisition, and the company appears to be struggling heading into that event as well. We are starting to wonder, however, if the market has been too harsh on the stock. If Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) can stabilize its business, and our concerns about the commodities business are reduced, it might become an attractive value play at its currently low multiples.
Disclosure: I own no shares of any stocks mentioned in this article.