Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) stunned its investors last December when it announced that it would buy two related energy companies- including Mcmoran Exploration Co (NYSE:MMR) which had some time ago been part of the same business as Freeport- and therefore expand its commodities business to include oil and gas. Many market watchers had treasured Freeport-McMoRan as a barometer of copper demand and therefore of global macro activity in general and China in particular. In addition, M&A activity often destroys shareholder value, and in this particular case the transaction price for the acquired companies seemed particularly high. The stock dropped about 20% and- despite a rally- is still down about 15% from its levels before the deal was announced.
Now a Form 4 filed with the SEC has disclosed that advisory Director J. Bennett Johnston (a former U.S. Senator from Louisiana) directly purchased 16,000 shares of the stock on March 1st at an average price of $31.48 per share. The stock currently trades at about $33. We track insider purchases because it generally doesn’t make sense for insiders to purchase more stock in the company (reducing their diversification) unless they have particularly high confidence; studies show that stocks bought by insiders have a small outperformance effect (read more about studies on insider trading).
Freeport-McMoRan Copper & Gold Inc.’s business as it currently is seems to be performing adequately. Last quarter revenue was up and margins expanded, contributing to a 16% increase in net income. The stock currently trades at 10 times trailing earnings, with a dividend yield of about 4%, which would arguably qualify it for value status. Of course, the copper business means that Freeport-McMoRan’s stock price is highly sensitive to the broader economy (the stock’s beta is 2.2). The forward P/E, based on analyst consensus for 2014, is only 7.
13F filings show that a number of hedge funds bought into Freeport-McMoRan Copper & Gold Inc. in the fourth quarter, possibly after its stock price plunged. We track these filings in part to help develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an excess return of 18 percentage points per year) and also to monitor how individual stocks are being traded (as well as how individual hedge funds are behaving. Billionaire John Paulson’s Paulson & Co. initiated a position of 9 million shares (see Paulson’s stock picks) and Omega Advisors, a hedge fund managed by billionaire Leon Cooperman, bought over 3 million shares of the stock (find Cooperman’s favorite stocks). Cooperman has in fact claimed that the acquisition will be good for the company.
It turns out that the stock is now trading at a discount to its peers in terms of earnings:
Southern Copper Corp (NYSE:SCCO), Newmont Mining Corp (NYSE:NEM), and Vale SA (NYSE:VALE) are three peers for Freeport-McMoRan. Southern Copper and Vale (an industrial metals miner) have betas of higher than 1.5, reflecting their sensitivity to economic conditions, while Newmont Mining primarily produces gold. The trailing earnings multiples at Southern Copper and Vale are considerably higher than at Freeport-McMoRan, in the 17-20 range, and neither company has turned in a particularly strong performance recently (though commodity prices rather than operations likely drive all of these companies’ results). Newmont, whose revenue declined 11% in the fourth quarter of 2012 versus a year earlier, has valuation multiples which are more in line with Freeport-McMoRan’s though there is still a small premium in both trailing and forward P/Es.
We’re certainly aware of the risks of M&A, but Freeport-McMoRan does seem cheap in terms of its current business and it’s possible the market has already accounted for any loss of shareholder value that will occur due to the transaction. We generally don’t give too much weight to insider purchases or hedge fund activity, but they certainly aren’t negatives in our eyes. With some peers trading at higher multiples we actually would say that Freeport-McMoRan is worth further research as long as integration risks are kept in mind.
Disclosure: I own no shares of any stocks mentioned in this article.
