Mining Stocks

FreePort-McMoRan Inc. Annual Stock Valuation – September 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 Near 52 Week Lows – September 2014.  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 Inc. (FCX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Freeport-McMoRan Inc. is a United States-based natural resources company with a global portfolio of mineral assets, including copper, gold, and molybdenum, in addition to oil and gas resources. FCX’s portfolio of assets includes the Grasberg minerals district in Indonesia; mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America; the Tenke Fungurume minerals district in the Democratic Republic of Congo, and oil and natural gas assets in North America, including reserves in the Deepwater GOM, onshore and offshore California and in the Haynesville natural gas shale play, and a position in the water Inboard Lower Tertiary/Cretaceous natural gas trend on the Shelf of the GOM and onshore in South Louisiana.
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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  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 $34.24
MG Value $116.29
MG Opinion Undervalued
Value Based on 3% Growth $43.95
Value Based on 0% Growth $25.77
Market-Implied Growth Rate 1.40%
NCAV -$31.21
PEmg 11.30
Current Ratio 1.36
PB Ratio 1.67

Balance Sheet – 6/30/2014

Current Assets $10,254,000,000
Current Liabilities $7,558,000,000
Total Debt $17,512,000,000
Total Assets $64,009,000,000
Intangible Assets $1,717,000,000
Total Liabilities $42,677,000,000
Outstanding Shares 1,039,000,000

Earnings Per Share

2014 (estimate) $2.26
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) $3.03
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 is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of earnings or dividend stability over the last ten years, and the insufficient earnings growth over the last ten years.  The Enterprising Investor is concerned by the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.01 in 2010 to an estimated $3.03 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.40% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of FreePort-McMoRan (FCX) for more perspective!

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 Inc. (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.

Disclaimer:  The author did not hold a position in FreePort-McMoRan Inc. (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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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