Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Southern Copper (SCCO -1.63%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell SoCo's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at SoCo's key statistics:
SCCO Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
49.7% |
Pass |
|
Improving profit margin |
(2.9%) |
Fail |
|
Free cash flow growth > Net income growth |
(33.8%) vs. 46.6% |
Fail |
|
Improving EPS |
49.1% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
17.7% vs. 49.1% |
Pass |
Source: YCharts. * Period begins at end of Q1 2010.
SCCO Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
4.6% |
Pass |
|
Declining debt to equity |
153.4% |
Fail |
|
Dividend growth > 25% |
(55.1%) |
Fail |
|
Free cash flow payout ratio < 50% |
464% |
Fail |
Source: YCharts. * Period begins at end of Q1 2010.
How we got here and where we're going
SoCo doesn't quite come through with flying colors, as it's only mustered four out of nine possible passing grades. A big source of that weakness is the company's falling free cash flow, which has diverged markedly from its net income over the past three years, and which may not be able to support its current dividend payouts if the trend continues. Will SoCo be able to turn this weakness around and rebound, or is the copper miner going to be tarnished for some time to come? Let's dig a little deeper.
A major part of SoCo's weakness -- copper prices -- is simply out of its hands, and the trend has not been favorable over the past few years. Since peaking in early 2011, copper prices have fallen back to roughly the same level they reached at the start of our three-year tracking period. SoCo's stock has actually outperformed the slide for a year, but Freeport McMoRan (FCX -1.33%) has almost exactly mirrored the movements of copper:
Copper LME Settlement Price data by YCharts
This, at least, seems to indicate a superior position for SoCo over its more diversified rival. SoCo has also been investing heavily in new infrastructure to exploit its assets. In nominal terms, the company's capital expenditures are less than half Freeport's, but run six times as high as smaller competitor Taseko Mines (TGB -3.66%):
SCCO Capital Expenditures Quarterly data by YCharts
Taseko's capex has actually grown at a faster rate during this time, and is now over 540% higher than it was in 2010. SoCo is no slouch, though, and its three-year capex spending growth of 320% puts it on pace to spend roughly $900 million a quarter by 2016. That might be a concern for long-term investors, as none of SoCo's core financial metrics (revenue, profit, or cash flow) have grown at anywhere close to that rate. A rebound in copper prices will certainly help smooth over this imbalance, but there are many near-term concerns that China -- the world's largest copper consumer -- is slowing down. SoCo investors should keep a close eye on Chinese economic reports for a clue to the future of their favorite copper stock.
Putting the pieces together
Today, Southern Copper has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
