Are These Copper Stocks Glitter or Dirt?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some people say that gold is the only thing that glitters. Personally, I think copper's pretty awesome. But what of the companies that produce it? Are they high quality or shady? Are they great deals or value traps? I honestly don't know, so let's take a look at some industry players.
Freeport-McMoRan Copper & Gold (NYSE: FCX) is a shining example of the power of being big. As one of the world's largest producers of both gold and the largest public producer of copper and molybdenum, they've got a definite advantage over the competition as far as economy of scale goes. I like how the company is rocking 16.6% profit margins. I also like how there seems to be a reasonably decent deal going on here, since Freeport is trading for 10.89 times earnings and 1.9 times book value. However, nothing's perfect.
Freeport has put out a few bribes to military and government officials to secure its mines, which I find a little disturbing primarily because they kept a lid on it for decades. But what really bothers me is that Freeport is the 22nd most pollutive company in the country by emission amounts and how toxic they are. While I like it a good deal, I also like my biosphere intact. I'll pass until Freeport cleans up its act a bit.
Southern Copper (NYSE: SCCO) has its ups and downs. On the plus sides, it's running a 29% profit margin and is 3/4 owned by Grupo Mexico, which combine to make Southern Copper a pretty stable company. Being a big company owned by an even bigger one is usually a firm way to get a good night's sleep. It's also doing great things in molybdenum, silver and zinc in addition to its bangup job as a copper smelter and refiner.
Overall, I'm only a little concerned about the dividend that looks too good to be true. The payout ratio of the 2012 dividend (79%) is a little high for my tastes because I like a dividend that isn't going to get tragically cut off (see 2008), rather like the 121% payout ratio Southern Copper hit in '08. I'm also not super excited about Southern Copper because it isn't exactly a steal at 17.89 times earnings and 5.3 times book value. I'd love to see Southern Copper get cheap because I'd like to own shares, pending a bit more research.
Sterlite Industries (NYSE: SLT) gives me a good amount to like. For one thing, I like how Sterlite is based in India and is in a serious growth industry. Since a lot of where Sterlite sells its copper rods is in the wire and cable industry, the company should benefit tremendously as India, the Middle East and Africa grow their infrastructure. They already have reasonably decent 9.5% profit margins.
Of course, I tend to wonder about how Sterlite's only pulling that kind of margins despite being in a hotzone of growth. I know this is supposed to be primarily copper companies, but I admit that I'm not too turned on about the fact that Sterlite also handles a range of other kinds of elements like lead and zinc, as well as a host of different chemicals. I like companies better when they just do a small range of things instead of trying to do everything. Sterlite isn't the Jim Thorpe or Michael Phelps of hard asset production.
pongun has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!