Major copper producer Freeport-McMoRan (NYSE: FCX) is trading nearly 25% below 52-week highs; seemingly a major steal for investors. However, global economic instability has hurt Freeport and other large miners in recent months, sending shares nose-diving with plummeting construction output and slowdowns in emerging economies. With that in mind, should you trust Freeport's cheap valuation and pick up this stock?
Financial fortitude
Wall Street can't get enough of Freeport, with 16 analysts rating the company a buy. Let's check out how the company stacks up with its large-cap, metal-mining peers.
|
Company |
P/E |
Net Margin |
Debt/Equity |
Return on Equity |
|---|---|---|---|---|
| Freeport-McMoRan | 10.7 | 17.2% | 0.17 | 21.9% |
| Southern Copper (NYSE: SCCO) | 11.3 | 34.7% | 0.59 | 55.7% |
| Rio Tinto (NYSE: RIO) | 19.7 | 7.3% | 0.32 | 7.1% |
Source: Yahoo! Finance
Mining's a capital-intensive industry, so the debt comes with the job. Still, it's comforting to see Freeport's more manageable debt, as compared to that of Rio Tinto and Southern Copper. Southern might boast a much higher net margin and ROE, but a look into the future spells some trouble. Southern's forward P/E of 13.1 nearly doubles Freeport's forward valuation.
You shouldn't overlook dividends, either. Freeport's dividend payout ratio of 32% gives it flexibility to increase its 3.5% dividend in the future. The company's grown said dividend at a five-year average rate of 3.1%; not a whopping number by any means, but a solid and steady growth.
Watch the big picture
Of course, a tumbling economy or the continued fall of copper prices could put a drastic damper on Freeport's stock. Copper prices haven't performed well at all this year, stricken with the Chinese economic slowdown and domestic construction activity. Still, Federal Reserve Chairman Ben Bernanke's announcement that he wouldn't rule out further monetary action could spark inflationary fears along with the expected economic growth.
That would do wonders for copper and gold, Freeport's other major mining commodity. Stimulus-boosted economic growth would increase copper demand, while inflation weakening the dollar would lift gold's price. Freeport and its shareholders win on both ends.
Investors should also keep an eye out for China, despite its slowdown. Rumors of a Chinese stimulus package have floated around the markets recently, sparking hope of action in the second-largest economy. While Southeast Asia's infrastructure boom will undoubtedly continue to fuel Freeport's revenues, a Chinese rebound and renewed infrastructure growth would set this stock on fire.
Let's hope the economy picks up
There's a lot of potential in Freeport should the economy continue its growth. While economic data looks gloomy at the moment, renewed stimulus from either the Fed or China could provide a boon for Freeport's shareholders. If you're looking for a value play in copper that could turn around in a great way, take the time to check out this potential turnaround star.
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