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 or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015. 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 stock analysis showing a specific look at how Freeport-McMoRan Inc. (FCX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Freeport-McMoRan Inc. (FCX) is a natural resource company with an industry portfolio of mineral assets, oil and natural gas resources, and a production profile. FCX has organized its operations into six primary divisions: North America copper mines, South America mining, Indonesia mining, Africa mining, Molybdenum mines, and United States oil and gas operations. The Company’s portfolio of assets includes the Grasberg minerals district in Indonesia, mining operations in North and South America, the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC) in Africa, and oil and natural gas assets in North America. The Company is also engaged in operating copper conversion facilities located in North America, and a refinery, three rod mills and a specialty copper products facility. The Company’s Atlantic Copper smelts and refines copper concentrates and markets refined copper and precious metals in slimes.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$11,921,014,123||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.84||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-63.57%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||-24.35||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||0.86||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.84||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||5.08||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||-$6.82|
|MG Value based on 0% Growth||-$4.00|
|Market Implied Growth Rate||-16.42%|
|% of Intrinsic Value||N/A|
Freeport-McMoRan Inc does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, inconsistent dividend history, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the level of debt relative to the net current assets, as well as the lack of earnings growth or stability over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.06 in 2011 to an estimated loss of $0.47 for 2015. This level of demonstrated earnings growth does not support a positive valuation due to the current negative EPSmg. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below 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 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$30.29|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$8,697,000,000|
|Total Current Liabilities||$4,739,000,000|
|Shares Outstanding (Diluted Average)||1,040,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||-$4.22|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||-$0.47|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to read our full disclaimer.