Will This Copper Stock Shine Again?

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Copper mining stocks have been experiencing a sell-off of late as macroeconomic worries have spooked some investors. However, fundamentals seem strong and prospects might not be as bleak as the market seems to believe they are.

Those looking for stock bargains amidst a bull market should perhaps consider copper mining stocks like Freeport-McMoRan Copper & Gold (NYSE: FCX). The company is one of the world's biggest mining players, focused on copper, gold, and molybdenum production.

Valuation metrics

With regards to valuation, the stock currently looks cheap: With a P/E of only 10.46, it is below the industry's average, and also below its main competitor, Southern Copper (NYSE: SCCO), which trades at a P/E of 16.18.

When factoring in future earning estimates, Freeport becomes even more attractive, as it currently trades at a forward P/E of just 6.99, also beating Southern's 13.37. When factoring in growth, however, Freeport's PEG of 3.49 pales in comparison with Southern's 0.96.

A similar situation occurs when looking at ROE figures: Southern's 44% beats Freeport's 18.33%. However, the story changes again if one focuses on the P/B ratio, as Freeport's 1.81 clearly beats Southern Copper's 6.55. All in all, Freeport looks undervalued based on past/future earnings and book value, more so than Southern Copper.

However, Southern seems to have better growth prospects, and significantly better ROE (ttm) figures. When comparing the stock to Rio Tinto (NYSE: RIO), Freeport beats it in current P/E, ROE, P/B, and PEG, but Rio does have a slight edge in Forward P/E.

Analyst ratings

Wall Street analysts seem to favor Freeport over Southern Copper. Freeport currently has an average recommendation of 2.20 (overweight-hold), while Southern has a 3.20 (hold-underweight) rating. With regards to price targets, Freeport currently has an average target price of $40.29, which implies that the stock has an almost 21% upside potential from current levels.

Southern Copper has an average price target of $41.24, implying an upside of less than 10%. Rio seems to be the most liked by analysts of the three, as it has an average recommendation of 1.30 (buy-overweight), and an average price target of $73.20, which implies the stock has an upside potential of almost 60%.

Dividend

Freeport also pays an attractive dividend of $1.25/share, which works out to a yield of 3.75% (compared to Southern Copper's 2.60%, or Rio's 4%). Freeport has paid a dividend to its shareholders since 1995. However, the company scrapped its dividend from 1999 to 2002, and did so again during the the financial crisis in 2009.

  P/E Fw P/E PEG P/B ROE Avg PT (%implied upside) Avg Rec Div Yield
FCX 10.46 6.99 3.49 1.81 18.33% $40.29 (+20.77%) 2.20 3.75%
SCCO 16.18 13.37 0.96 6.55 44.07% $41.24 (+9.42%) 3.20 2.60%
RIO N/A 6.24 N/A 1.83 -6.06% $73.20 (+56.7%) 1.30 4.02%
Edge FCX RIO SCCO FCX SCCO FCX RIO RIO


Momentum & price movements

Freeport has been lagging behind this year. In fact, Freeport's stock has dropped more than 3% so far this year. It is currently almost 23% below its 52-week high of $42.93, and only 9.46% above its 52-week low of $30.27. The stock is also far from its historical highs of 2008 or 2011, when it reached $60/share; but is also comfortably above its 2008 lows of $8.40.

So, while in 2008 and 2009 Freeport performed fabulously (albeit coming from the drastic financial crisis lows), the stock cooled off in 2011, and has been under-performing the market of late. Momentum is therefore not on Freeport's side, but that could signal a buying opportunity for those contrarian investors who might be trying to find bargains in a bullish market.

Insider buying

It seems that company insiders have been starting to take advantage of Freeport's depressed stock value. On March 1, Freeport's Advisory Director, Mr. Bennett Johnston, bought 16,000 shares in the open market at an average price of $31.48/share, bringing the total value of the purchase to more than a half a million dollars ($503,614).

Mr. Bennett's purchase, however, is not an isolated event, as the company's Executive Vice President and CFO, Mrs. Kathleen Quirk, had bought 15,000 shares in January, albeit through an option exercise.

Earnings

The company reported EPS of $0.74 for the last quarter, narrowly beating the analyst estimate average of $0.72. Revenue figures for the quarter were also higher than expected ($4.51 billion compared to the consensus estimate of $4.48 billion), representing an 8.4% gain on a year-over-year basis.

Compared to Q4 2011, both sales of copper and gold increased, and the company expects this trend to continue (they project a rise of at least 7% in copper sales in America for 2013). In fact, company officers stated that they expected a growth in copper production to more than 5 million pounds for 2015.

Some point out that the company will suffer from a decrease in Chinese metal buying, but, after monetary easing policies, copper demand in China is expected to be 8.5% higher in 2013, and, as Europe slowly recovers from the recession, worldwide demand for copper should continue to rise.

At any rate, one of the strongest asset for Freeport is its diversification. The company has tried to steer away from its dependence on copper production, and has purchased two oil and gas drillers for $20 billion. This should not only make Freeport less dependent on the industrial and construction sectors (which are nonetheless expected to grow), but it should be a potential growth catalyst for the company. 

Bottom line

Attractive valuations, moderately bullish analysts, and insider buying paint a positive picture of a stock that has not been driven into expensive territory in the recent bull market. The stable earnings outlook, and the potential for future growth, could make this stock a good play this year. Current prices could indicate a good entry point for interested investors. However, the stock is known to be significantly volatile, so investors should brace themselves for a bumpy ride. 


Alex Bastardas 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!

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