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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
The perils of Peru
Peruvian stocks took a pounding yesterday, as the MSCI All Peru Capped Index (INDEX: EPU ) lost 1.2% of its market cap. Individual stocks within the group, including Companhia de Minas Buenaventura (NYSE: BVN ) , Austral Group SA, and Aceros Arequipa suffered even greater losses. Foreign firms (with significant Peruvian exposure) weren't spared, either. In particular, shareholders of Southern Copper (NYSE: SCCO ) saw their shares shed more than 6% on fears that Europe's debt crisis will crimp demand for the shiny metal ... and a downgrade that seemed to confirm these fears.
On Tuesday, respected British banker Barclays announced it's throwing in the towel on Southern Copper, removing its equalweight rating on the stock and downgrading to underweight (i.e., "sell"). The reason: Street expectations for 13% long-term growth at the company seem "excessively optimistic." As ratings watcher StreetInsider reported yesterday, Barclays worries that Southern Copper faces "serious challenges to deliver volume growth" and "rising" project execution risks on its Peruvian operations in particular. The analyst points out that six years ago, Southern Copper was producing 690,000 tons of copper annually -- but is only expected to produce 606,000 tons in 2012.
With typical British understatement, Barclays suggests investors exercise "caution" on Street projections that Southern Copper will turn around and up its copper production to 1 million tons or more by 2016. Simply put -- that's not the way the trend is heading.
Numbers don't lie
Should you listen to Barclays? If you didn't, I can't say I'd blame you. Fact is, this analyst's record on metals and mining stock can most charitably be described as "mixed." (Less charitable observers might prefer the adjective "miserable.") Over the course of the three years we've been tracking Barclays on CAPS, the analyst has actually only gotten about 1 pick in 4 right in the mining industry. Even on Wall Street, that's pretty poor performance...
That said, I also see where Barclays is coming from when it pans Southern Copper -- and I can't say I even disagree with the assessment. At 10 times earnings, Southern Copper already sells for a steep premium to the single-digit valuations of rival copper miners such as Freeport-McMoRan (NYSE: FCX ) , Vale (NYSE: VALE ) , Rio Tinto (NYSE: RIO ) , and even BHP Billiton (NYSE: BHP ) . With so many cheaper names to choose from, I'm hard-pressed to find a reason to buy the more expensive stock in this sphere.
True, Southern Copper pays a superior dividend yield, and I suspect the 8.9% payout is what attracts a lot of income investors to the stock. But I do wonder how safe that dividend is.
Consider: At its current level of $2.80 per share, Southern Copper's forward dividend yield requires the company to pay out some $2.35 billion in dividends over the next 12 months. That's about $200 million more than the company currently collects in annual cash flow -- and that's not even counting the need to invest in capex. (Copper mining being, as you can imagine, a rather capital-intensive endeavor.)
Foolish takeaway
In short, it wouldn't surprise me a bit if Southern Copper finds itself forced to cut back on dividend payments in the year to come, an event that might eliminate the stock's major attraction for many investors. Failing that, Southern Copper would likely have to dig itself deeper into debt than it already is (i.e., about $1 billion in the hole). Or it could be forced to skimp on capital investments in an effort to keep shareholders happy. Or ... all of the above.
In short, anyway you look at it, the situation looks grim for Southern Copper. And Barclays is right to advise selling it.
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