Freeport-McMoRan Copper & Gold Quarterly Valuation – June 2014 $FCX

500px-Freeport_McMoRan.svgBenjamin 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 or by reviewing the 5 Undervalued Companies for the Defensive Investor.  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 (FCX) 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.

FCX Chart

FCX data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. 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 – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $33.56
MG Value $113.33
MG Opinion Undervalued
Value Based on 3% Growth $42.84
Value Based on 0% Growth $25.11
Market-Implied Growth Rate 1.43%
NCAV -$32.01
PEmg 11.36
Current Ratio 1.75
PB Ratio 1.65

Balance Sheet – 3/31/2014

Current Assets $9,430,000,000
Current Liabilities $5,383,000,000
Total Debt $19,759,000,000
Total Assets $63,843,000,000
Intangible Assets $1,916,000,000
Total Liabilities $42,693,000,000
Outstanding Shares 1,039,000,000

Earnings Per Share

2014 (estimate) $2.03
2013 $2.64
2012 $3.19
2011 $4.77
2010 $4.50
2009 $2.93
2008 -$14.86
2007 $3.71
2006 $3.15
2005 $2.34
2004 $0.43

Earnings Per Share – ModernGraham

2014 (estimate) $2.95
2013 $3.48
2012 $2.64
2011 $1.64
2010 $0.01
2009 -$1.67

Dividend History

FCX Dividend Chart

FCX Dividend data by YCharts

Conclusion:

Freeport-McMoRan satisfies the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the low current ratio, as well as the lack of earnings stability over the last ten years and the lack of stable dividend payments over that time frame.  The Enterprising Investor’s only concern is with the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be significantly undervalued after growing its EPSmg (normalized earnings) from $0.01 in 2010 to an estimated $2.95 for 2014.  This level of demonstrated growth more than supports the market’s implied estimate of 1.43% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

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.

Be sure to review the previous ModernGraham Valuations of Freeport-McMoRan (FCX)!

Disclaimer:  The author did not hold a position in Freeport-McMoRan (FCX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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