Why China Could Affect Your Portfolio in the Near Term
Robinson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is evidence that Chinese manufacturing activity is slowing down. Readings on China’s PMI showed a slight but constant contraction. One of the consequences is that the prices of several metals may experience downward pressure. Copper comes to mind since the commodity is often regarded as the industrial activity barometer. Since manufacturing is contracting, it would be a good idea to stay away from these stocks.
Copper miners have strong headwinds! Be careful!
Freeport-McMoRan (NYSE: FCX) is a miner of copper, gold and molybdenum. It has recently diversified its operations to oil exploration and production with the incorporation of McMoran. The company trades with a price-to-earnings ratio of 9.2, compared to the industry’s average of 10.6. Its revenues remained unchanged at $4.58 billion, but its net income declined by $100 million to $648 million.
One concern for investors may be the company's dividend offer. Although the company pays a 4.5% dividend of $1.25 per share, its free cash flow declined from $94 million to $26 million. With copper prices down, revenues may continue to fall and its free cash flow may be negatively affected.
With China’s expectations of slower growth in the interim, the prices of copper may not rebound. Deutsche Bank expects the supply of copper between 2013 and 2015 to exceed demand by an average of 500,000 metric tons per year. This will hurt Freeport-McMoRan's exports to China, and thus its revenues.
This decline in revenues may be partially offset by the company's oil exploration and production section. Crude oil prices jumped significantly to mid $100s in the last month. Investors should delve through the third quarter earnings release to discover how much the oil sector has aided for the company’s revenues.
Southern Copper Company (NYSE: SCCO) produces copper, silver, zinc and molybdenum. It trades with a price-to-earnings ratio of 13.0, above the industry’s average of 10.6. Its revenues declined by 7% to $1.6 billion, and its net income declined by 20% to $495 million.
Investors earn $0.80 per share yearly on a 2.88% dividend. I believe the company's dividend safety is higher at this point in comparison with Freeport-McMoRan. The company's free cash flow did shrink, however, ending at $278 million as compared to $543 million a year ago. If the free cash flow continues its decline, the company's dividend offer may be in serious jeopardy.
Southern Copper's stock also trades in high correlation with copper prices. As a result, if China creates a copper surplus then the commodity prices will go down; this could make the stock trade at much lower levels. Investors should stay away from the company for the time being.
This company may perform better
Vale (NYSE: VALE) is a Brazilian metals and mining company. It produces copper, iron, and other metals. The company trades with a price-to-earnings ratio of 14.3, compared to the industry’s average of 50.8. Its revenues remained unchanged at $10.9 billion in the last quarter, but its net income declined by 20% to $3.1 billion.
Vale offers a 5.5% dividend to its investors, which equals $0.75 per share. What’s more important, though, is that its free cash flow increased by 10% to $321 million. This means that the overall stability of the dividend is good in the interim.
Even though Vale may be regarded as an income stock, the political unrest in Brazil should not go unnoticed. There have been several riots in the country because the government is spending large amounts of money in the Soccer World Cup and Olympics venues. The Brazilian government is enacting acts to reform the taxation from mining industries, which could place Vale in unnecessary trouble.
There is the copper issue to consider as well. Low prices of the commodity mean lower operating margins. Before jumping on Vale, investors should look for an overall in the industrial metals prices. It would also be wise to wait until the waters calm down in Brazil.
A good foolish wrap-up
China’s slowdown in its industrial activity seems more real. Copper prices have steadily declined, and miners of copper and other industrial metals have paid the price through lower revenues. Therefore, I believe that investors should stay away from all of these stocks for now.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and 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!