Why Do Hedge Funds Like Freeport McMoRan?

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Freeport-McMoRan (NYSE: FCX) is not a safe stock. Statistically it has a beta of 2.3, indicating that the stock price moves sharply with the broader markets; however, it has declined 3% over the last year against a rising market, and its mere 1% gain so far in 2012 underperforms as well. As can be inferred, Freeport McMoRan is a mining company which provides copper and gold; it also produces other metals such as silver and rhenium. It operates worldwide including in the Americas, Africa, and Asia. Copper has become a stand-in for global growth, with its prices rising and falling on macro news. Gold, as a precious metal, sees its price rise with expected inflation and thus also benefits from strong economic numbers (as well as from easy monetary policy).

Prices last quarter, however, were not kind to the company. Revenue fell by 23% compared to the same quarter in 2011, and because Freeport McMoRan’s expenses are more or less fixed its net income fell by nearly half. According to the company, the fall in revenue was due to both lower prices (with slightly higher gold prices not making up for a large decrease in copper prices compared to a year ago) and lower sales volumes in both gold and copper. For the first half of the year revenue was down 21% and earnings were down 47%.

Freeport-McMoRan Copper & Gold Inc. trades at 12 times trailing earnings and pays a dividend of 3.2% at current prices and dividend levels. As such, the company is well positioned for any turnaround in the global economy and even if copper and gold prices hold steady it could prove to be fairly valued. Wall Street analysts are bullish on commodity prices and so the forward P/E based on earnings estimates is 8. The company is also in a good cash position: it has $4.5 billion in cash and cash equivalents on hand versus $3.5 billion in debt, and generated $4.6 billion in cash flow from operations on a trailing basis. Obviously cash flow, like income, depends on commodity prices but Freeport McMoRan seems financially stable for now.

48 hedge funds and other major investors who are tracked in our 13F database reported owning shares of the stock at the end of June, up from 46 three months earlier. Ken Fisher’s Fisher Asset Management owned 14.1 million shares, about the same as the end of March (see more stock picks from Fisher Asset Management). D.E. Shaw cut its stake in the company but still owned 2.1 million shares, making it still one of the top holders of the stock according to filings (learn more about D.E. Shaw's portfolio). Adage Capital Management, run by Harvard Management alumni Phil Gross and Robert Atchinson, had a position in the stock at the beginning of April but increased it dramatically during the last three months to 2.7 million shares (find more of Adage Capital Management's favorite stocks).

Freeport McMoRan can be compared to both copper and gold mining companies. Peers on the copper side are Southern Copper (NYSE: SCCO) and Sterlite Industries India Limited (NYSE: SSLT). These companies trade at 12 and 9 times trailing earnings, about even with Freeport-McMoRan Copper & Gold Inc.; Southern Copper’s forward P/E ratio is 14. So the sell-side expects industry dynamics to increase Freeport McMoRan’s earnings per share next year but for the same macro factors to cause Southern Copper’s EPS to fall. This may be accurate, but it leads us to be skeptical of the projected growth that gives Freeport McMoRan such an attractive forward earnings multiple. Newmont Mining (NYSE: NEM) and Barrick Gold (NYSE: ABX) are gold miners (though Newmont does also have a copper operation), and they trade at 11 and 8 times forward earnings estimates, respectively. All four of these comparable companies pay lower dividend yields than Freeport McMoRan. However, all of them are close in terms of their valuation multiples.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Sterlite Industries (India) Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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