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Freeport Is A Strong Turnaround Story

August 02, 2014 | About:
Faisal Humayun

Faisal Humayun

3 followers

Freeport-McMoRan (FCX), a natural resource company engaged in the acquisition of mineral assets, and oil and natural gas resources has seen the worst of times with a slowdown in China and operational problems in Indonesia. This article discusses the reversal of some of the issues and why Freeport-McMoRan is a good stock to own.

Resumption of Exports From Indonesia

On July 25, 2014, Freeport-McMoRan announced that its Indonesian subsidiary PT Freeport Indonesia received approval from the Government of Indonesia to resume exports of copper concentrates. PT-FI will resume full operations immediately and concentrate exports are expected to commence in August 2014. This is an immediate positive and will impact the company’s results from the next quarter.

Certain issues are still pending for resolution with the government of Indonesia. The government wants to increase its ownership in the Grasberg mine to 30% from 10% and the parties are in negotiation for a fair value for the deal.

Further, Freeport-McMoRan wants the continuation of operation in Grasberg mine from 2021 to 2041. If both these issues are resolved over the next six months, Freeport-McMoRan will have few more upside triggers. With a major issue resolved, it is likely that both these issues will reach a resolution soon.

Strong Second Quarter Results

Freeport-McMoRan reported strong results for the three months ended June 2014. The revenue increased by 29% to $5,522 million in 2Q14 as compared to $4,288 million in 2Q13. For the same period, the operating income surged by 80% to $1,153 million from $639 million.

Even for the six months ended June 2014, the company’s revenue increased by a robust 18% to $10,507 million as compared to $8,871 million in 1H13. Therefore, the company is in a strong growth reversal trend and this is the best time to consider exposure to the stock.

For the first half of 2014, the company’s operating cash flow has also been robust at $2,587 million as compared to $1,978 million in the first half of 2013. During the same period, the company’s capital expenditure has increased to $3,562 million as compared to $1,978 million.

I believe that a strong reversal in investment is a very positive sign and the company is increasingly investing as it sees the potential for increase in sales and markets in the foreseeable future.

High Dividends Will Continue

Freeport-McMoRan currently offers a dividend of $1.25 per share and a healthy dividend yield of 3.6%. A turnaround in terms of revenue and also a reversal in terms of capital expenditure mean that strong growth is likely to continue. This will translate into continued strong dividends.

I believe Freeport-McMoRan is a good dividend stock and the yield is sustainable. The company also offers exposure to growth in emerging markets. Investors can therefore feel comfortable about dividends from the stock over the next few quarters.

Strong Oil & Gas Sales

Freeport-McMoRan’s oil & gas entry is one of the key reasons for liking the stock. Oil & gas segment will provide a higher EBITDA margin and this will boost the overall EBITDA margin for the company.

For the second quarter of 2014, sales from oil & gas operations was 16mmboe and this included 1.7 million barrels of oil, 20.3 billion cubic feet of natural gas and 1.0mmbls of natural gas liquids.

Therefore, Freeport-McMoRan is already recording significant production and this is positive for the company for the long-term. Value investors might find this an attractive investment point.

Valuation Offers Entry Point

The current valuation is a big positive besides the fact that Freeport-McMoRan is making a strong comeback when it comes to growth and capital expenditure.

Freeport-McMoRan is currently trading at a cheap EV/EBITDA of 6.21 and a PEG ratio (5-year expected) of 0.41. Freeport-McMoRan is also trading at a forward (2015) PE of 112.9.

This undervaluation offers investors an attractive entry point for a company that is likely to grow at a strong pace. Freeport-McMoRan’s forecasted earnings growth is 23% for 2015 and 78% for 2016. The next 3-4 years are therefore likely to be good for the company.

Conclusion

Freeport-McMoRan’s resolution of the Indonesian export issue is a big positive step forward for the company. It is likely that other issues in Indonesia will also be resolved over the next 6 months.

Freeport-McMoRan is undervalued currently and the positive developments provide a good investment opportunity for the long-term in this high dividend yield stock. Investors can consider Freeport-McMoRan at current levels and on any correction as the broad market sentiments look bearish.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 0.0/5 (0 votes)

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