Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how FreePort-McMoran fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Freeport-McMoRan Copper & Gold Inc. (FCX) is an international mining company. FCX is one of the copper, gold and molybdenum mining companies in terms of reserves and production. Its portfolio of assets includes the Grasberg minerals district in Indonesia, mining operations in North and South America, and the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC). The Grasberg minerals district contains the recoverable copper reserve and the gold reserve. It also operates Atlantic Copper, its wholly owned copper smelting and refining unit in Spain. FCX has its operations into five primary divisions: North America copper mines, South America mining, Indonesia mining, Africa mining and Molybdenum operations. In May 2013, the Company completes acquisition of Plains Exploration & Production Company. In June 2013, FCX acquired the remaining 64% interest in McMoRan Exploration Co.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$50.46|
|Value Based on 0% Growth||$29.58|
|Market-Implied Growth Rate||0.17%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
FreePort-McMoran is an interesting company in the ModernGraham valuation model. It does not pass the requirements of the Defensive Investor, as it has not consistently paid dividends over the last ten years, and it has not shown earnings stability over the last ten years. But it does pass the requirements of the Enterprising Investor, though it has a higher level of debt relative to current assets than the investor type likes to see. As a result, Enterprising Investors should feel comfortable proceeding with their research, beginning with a review of a Glance at the Dow and 5 Low PEmg Companies for the Enterprising Investor. From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013. As it stands, the EPSmg have grown from -$1.67 to $3.48, indicating a high level of growth that would appear to significantly outpace the market’s implied estimate of 0.17% earnings growth. This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on FreePort-McMoran (FCX)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Freeport-McMoran (FCX) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.