At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So, you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
Bad news this week for Freeport-McMoRan Copper & Gold (NYSE: FCX ) investors: Deutsche Bank hates your stock. The Teutonic megabanker weighed in on the company's prospects yesterday, arguing that: "recent price rallies seemingly disconnected from underlying operating fundamentals of low capacity utilization." Deutsche said that it's downgrading the stock "based on a recent price spike," but that wasn't the only issue the banker had with Freeport's business.
Continued Deutsche: "[W]e do not have conviction that shares have touched bottom given our bleak view of the industrial landscape, which points to a long and protracted bounce along the bottom, as opposed to a V-shaped recovery that would bring the sector back to reasonable profitability before 2011." In other words, things are going to get worse before they get better -- and even when they do, those "better" times may be years in coming. But is Deutsche right?
Let's go to the tape
I'm at an impasse, Fools. It's a conundrum. You see, I actually agree with Deutsche today -- but when I look a bit closer at just who it is I'm agreeing with, it makes me question the wisdom of selling Freeport.
According to our records on CAPS, there aren't many investment bankers out there today who do more poorly on their picks than Deutsche. Despite getting nearly as many recommendations right as it does wrong, and despite making a handful of prescient picks in the mining sector ...
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Deutsche Says
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CAPS Says (out of 5)
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Deutsche's Pick Beating S&P By
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Barrick Gold (NYSE: ABX )
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Outperform
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****
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63 points
|
|
Newmont Mining (NYSE: NEM )
|
Outperform
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***
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53 points
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... Deutsche nonetheless manages to underperform more than 75% of CAPS investors and two-thirds of Wall Street investors tracked on CAPS. As it turns out, you see, for every pick Deutsche gets right in this realm, it gets another couple of 'em wrong:
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Deutsche Says
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CAPS Says
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Deutsche's Pick Lagging S&P By
|
|
Mechel (NYSE: MTL )
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Outperform
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****
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49 points
|
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Southern Copper (NYSE: PCU )
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Underperform
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*****
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35 points
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Cliffs Natural Resources
(NYSE: CLF )
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Outperform
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****
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29 points
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AngloGold Ashanti (NYSE: AU )
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Underperform
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***
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18 points
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Hardly an enviable record, I think you'll agree. And yet, truth be told, I actually think Deutsche is right about Freeport today -- its anemic past performance in this sector notwithstanding.
Focusing on Freeport
Here's why: In the fourth quarter last year, Freeport wrote off the entire balance of goodwill ($6 billion) and wrote down the value of its copper and molybdenum assets (a $11 billion charge), both from its 2007 acquisition of Phelps Dodge. For the record, combined, that's more than the company itself is worth today (about $15.7 billion).
Yet in the wake of these massive writedowns, Freeport shares have skyrocketed off their lows of late last year. Trading at just under $17 a share in early December, Freeport now fetches more than twice that. As a result, the market is now valuing Freeport at roughly 7.6 times its book value -- and it looks frightfully overpriced relative to archrivals Newmont (selling for 3.1 times book) and Southern Copper (at 4.4 times).
Freeport is also much more heavily leveraged than its rivals, its balance sheet weighed down by more than $6.4 billion in net debt. And with the company generating barely $660 million in free cash flow last year, and Deutsche opining that business will not turn around soon, it's going to take an awfully long time for Freeport to work down that debt.
Foolish takeaway
One final word before I close today's column. Based on the numbers on its books, Freeport looks like a long-term loser to me. Based on its numbers, following Deutsche's advice on mining companies looks like a similarly bad bet. But there's one thing I haven't mentioned yet: Among its many, many bad calls in the mining sector, one company Deutsche has done well with is ... Freeport itself.
The last time Deutsche recommended buying the stock, back in March 2007, Freeport proceeded to wallop the market, outperforming the S&P's returns by better than 26 percentage points over the next 19 months. Maybe "past performance is no guarantee of future success." But between the stock's evident overvaluation today, and Deutsche's prescient call on Freeport two years ago, I'm betting that this banker is right again this time.
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