Is Freeport-McMoRan Copper & Gold Inc. Destined for Greatness?

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 Freeport-McMoRan Copper & Gold (NYSE: FCX  ) 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 Freeport-McMoRan'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 Freeport-McMoRan's key statistics:

FCX Total Return Price Chart

FCX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

4.9%

Fail

Improving profit margin

(50.7%)

Fail

Free cash flow growth > Net income growth

(91.9%) vs. (48.3%)

Fail

Improving EPS

(52.3%)

Fail

Stock growth (+ 15%) < EPS growth

(28.9%) vs. (52.3%)

Fail

Source: YCharts. * Period begins at end of Q1 2011.

FCX Return on Equity (TTM) Chart

FCX Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(71.3%)

Fail

Declining debt to equity

186.3%

Fail

Dividend growth > 25%

25%

Pass

Free cash flow payout ratio < 50%

626.9%

Fail

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Freeport-McMoRan's performance has significantly deteriorated since we examined it last year, and it earns only one out of nine possible passing grades in its second assessment, down from four passes in 2013. Freeport's bottom line has been trending in the opposite direction, which has hurt it on our income-based assessments, and the company could slip further if it fails to prop up its free-falling free cash flow, as its dividend payouts -- the only metric to show positive momentum -- appear to be rather unsustainable. Can Freeport turn its sliding metrics around to earn a better grade next time? Let's dig a little deeper to find out.

Freeport recently came through with market-topping revenue and earnings per share for its first quarter, thanks to higher production in the Eagle Ford Shale and the Gulf of Mexico, combined with lower cash costs for copper. However, export restrictions on its Grasberg copper facility in Indonesia, along with year-over-year declines in both copper and gold volumes and prices, have weighed down Freeport's bottom line. The company has been vigorously fighting an oppressive 25% export tax imposed by the Indonesian government on unprocessed mineral ores (including copper), which is likely to cost it sales of 50 million pounds of copper and 80,000 ounces of gold if exports aren't restarted.

Freeport recently entered a 50/50 joint venture with United LNG to build out the Main Pass Energy Hub in the Gulf of Mexico, which is currently seeking regulatory approval. Freeport's Main Pass terminal already holds a tentative 20-year natural gas export deal with India, which would help fill the void left by Russian energy giant Gazprom's $400 billion deal with PetroChina to de-emphasize exports to European markets. Freeport will also purchase Apache's (NYSE: APA  ) interest in several Gulf properties for roughly $1.4 billion, further strengthening its oil and gas segment in the region.

Fool energy specialist Matt DiLallo notes that the Freeport-Apache deal will grant Freeport stakes of roughly 12% and 13%, respectively, in Anadarko Petroleum's (NYSE: APC  ) Lucius and Heidelberg development projects. Freeport is also acquiring 11 deepwater exploration leases from Apache, with working interests ranging from 17% to 60%. Fool energy specialist David Smith also notes that Freeport-McMoRan Oil & Gas CEO James Flores has acquired more than three million shares over the past several months, which offers a much-needed show of executive support for beleaguered shareholders.

Fool energy specialist Vladimir Zernov notes that the company will divest some Eagle Ford shale assets to Encana for $3.1 billion as part of an ambitious plan to reduce debt on the balance sheet from $19.8 billion to $12 billion by 2016 and to refocus on the Gulf of Mexico. Gulf assets contributed nearly 46% of Freeport's cash operating margin in the first quarter, compared to just 32% from its Eagle Ford assets, which further supports a transition from the latter region to the former. However, Freeport has no solid plans to divest its gas-rich Haynesville assets despite an ongoing weakness in natural gas prices.

Putting the pieces together
Today, Freeport-McMoRan has few 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.

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