Mining Stocks

Freeport-McMoRan Inc Valuation – January 2017 $FCX

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 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  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 a portfolio of mineral assets, and oil and natural gas resources. The Company’s segments include the Morenci, Cerro Verde, Grasberg and Tenke Fungurume copper mines, the Rod & Refining operations and the U.S. Oil & Gas Operations. It has organized its operations into five primary divisions: North America copper mines, South America mining, Indonesia mining, Africa mining and Molybdenum mines. Its 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 the United States. Its Atlantic Copper smelts and refines copper concentrates, and markets refined copper and precious metals in slimes. It has a smelter at its Miami, Arizona, mining operation, and molybdenum conversion facilities in the United States and Europe.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of FCX – January 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $22,228,817,601 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.45 Pass
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 60.34% Pass
6. Moderate PEmg Ratio PEmg < 20 -5.50 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.83 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 2.45 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.40 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

EPSmg -$2.99
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth -$43.36
MG Value based on 0% Growth -$25.42
Market Implied Growth Rate -7.00%
Current Price $16.44
% of Intrinsic Value N/A

Freeport-McMoRan Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.39 in 2013 to an estimated $-2.99 for 2017. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Freeport-McMoRan Inc revealed the company was trading above its Graham Number of $5.5. The company pays a dividend of $0.05 per share, for a yield of 0.3% Its PEmg (price over earnings per share – ModernGraham) was -5.5, which was below the industry average of 47.18, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-14.77.

Freeport-McMoRan Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$14.77
Graham Number $5.50
PEmg -5.50
Current Ratio 2.45
PB Ratio 3.83
Current Dividend $0.05
Dividend Yield 0.30%
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $10,435,000,000
Total Current Liabilities $4,265,000,000
Long-Term Debt $14,795,000,000
Total Assets $37,317,000,000
Intangible Assets $0
Total Liabilities $31,266,000,000
Shares Outstanding (Diluted Average) 1,410,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.32
Dec2016 -$3.16
Dec2015 -$11.31
Dec2014 -$1.26
Dec2013 $2.64
Dec2012 $3.19
Dec2011 $4.78
Dec2010 $4.57
Dec2009 $1.47
Dec2008 -$14.86
Dec2007 $3.75
Dec2006 $3.32
Dec2005 $2.34
Dec2004 $0.43
Dec2003 $0.49
Dec2002 $0.44
Dec2001 $0.27
Dec2000 $0.13
Dec1999 $0.31
Dec1998 $0.34
Dec1997 $0.53

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate -$2.99
Dec2016 -$3.76
Dec2015 -$2.83
Dec2014 $1.86
Dec2013 $3.39
Dec2012 $2.46
Dec2011 $1.37
Dec2010 -$0.34
Dec2009 -$2.13
Dec2008 -$2.95
Dec2007 $2.69
Dec2006 $1.91
Dec2005 $1.06
Dec2004 $0.40
Dec2003 $0.37
Dec2002 $0.30
Dec2001 $0.26

Recommended Reading:

Other ModernGraham posts about the company

Freeport-McMoRan Inc. Analysis – September 2015 Update $FCX
17 Companies in the Spotlight This Week – 9/20/2014
FreePort-McMoRan Inc. Annual Stock Valuation – September 2014 $FCX
5 Undervalued Companies with a High Beta – September 2014
5 Companies to Research with the Lowest PEmg Ratio for the Enterprising Investor – August 2014

Other ModernGraham posts about related companies

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Silver Wheaton Corp Valuation – December 2016 $SLW
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Goldcorp Inc Valuation – August 2016 $GG
Alliance Resource Partners LP Valuation – September 2016 $ARLP
Silver Wheaton Corp Valuation – August 2016 $SLW

Disclaimer:

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 review our detailed disclaimer.

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