Freeport-McMoRan (FCX, Financial) has been on a continuous slide since July 2014. From peak levels of $39.04 in July 2014, the stock has declined to current levels of $22.82. While there are several negative factors that have resulted in a decline for Freeport-McMoRan, most of the factors are related to the macro-economic scenario and the decline in oil prices. Amidst these challenges, Freeport-McMoRan has done well to sell certain assets and manage debt.
In this article, I will discuss the key positives about the company in a gloomy scenario. These factors back my view that investors can gradually accumulate Freeport-McMoRan for the long term. I say “gradually accumulate” as further decline in oil prices can result in another round of correction. However, the stock certainly looks attractive at current levels and the downside from here can be minimal.
Talking about limited downside, the first reason to be bullish on Freeport-McMoRan is the current valuations. I believe that a trailing 12 month EBITDA of 4.96, a PEG (5-year expected) of 0.28, a price to sales of 1.04 and a price to book of 1.07 are attractive and the stock might not come back to these valuations once oil prices recover along with some recovery in the global economy.
Freeport-McMoRan also offers an annual dividend of $1.25 per share and a dividend yield of 5.2% at current levels of $22.82. A strong dividend payout is another reason to consider investing in Freeport-McMoRan. I believe that the company’s current dividend is sustainable.
I also like the fact that Freeport-McMoRan has been extending its debt maturity through the refinancing of debt. On November 14, 2014, the company issued new debt worth $3 billion with a bulk of the maturity coming after 2020. The company has used the proceeds from the debt to repay the near-term debt outstanding. On November 20, 2014, Freeport-McMoRan announced that the company will be purchasing debt worth $1.25 billion.
Further, on November 3, 2014, Freeport-McMoRan closed the sale of certain assets for $1.8 billion and the company intends to use the proceeds to repay $1.5 billion in debt. I expect that Freeport-McMoRan will go for further asset sale to bring the debt to manageable limits and also to increase the financial flexibility to invest in the higher margin oil business.
I must add here that amidst the positives related to current valuations, good dividend yield and well managed debt profile, there are two points of concern for Freeport-McMoRan in 2015. These factors will determine how fast the surge is for Freeport-McMoRan from current stock price levels.
The first factor of concern is oil prices. The company’s oil segment is a major EBITDA driver and will continue to become a bigger EBITDA driver in the future. The key hindrance is lower oil prices in 2015. With the supply glut, if oil prices remain at $60 to $70 per barrel, Freeport-McMoRan’s EBITDA, cash flow and growth will be impacted. While the stock has discounted this negative factor, the stock upside will come only on meaningful oil price recovery. Uncertainly in oil prices will keep the stock trend for Freeport-McMoRan sluggish.
China is the second factor of concern with the country being the largest consumer of copper in the world. China’s economic growth is likely to be lower in 2015 as compared to 2014. If sluggish growth continues in China, copper prices and demand will remain weak. This will impact the company’s copper division revenue and investments. Even the China slowdown factor is discounted in the stock, but if the slowdown persists for long, the stock can remain depressed.
Therefore, there are positives and concerns related to Freeport-McMoRan at this point of time. I have therefore recommended gradual exposure to the stock and I caution against big exposure at this point of time even when my opinion is that valuations are attractive. Freeport-McMoRan has been a big value creator in the past and the stock will again be a value creator once the current down cycle for commodity and energy prices is over.
