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Has Freeport-McMoRan Become the Perfect Stock?

By Dan Caplinger - Nov 9, 2012 at 5:36PM

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Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Freeport-McMoRan Copper & Gold ( FCX -1.46% ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that a company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Freeport-McMoRan.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4.2%

Fail

 

1-Year Revenue Growth > 12%

(20.9%)

Fail

Margins

Gross Margin > 35%

43.2%

Pass

 

Net Margin > 15%

16.6%

Pass

Balance Sheet

Debt to Equity < 50%

17%

Pass

 

Current Ratio > 1.3

3.23

Pass

Opportunities

Return on Equity > 15%

20.1%

Pass

Valuation

Normalized P/E < 20

14.58

Pass

Dividends

Current Yield > 2%

3.2%

Pass

 

5-Year Dividend Growth > 10%

12.5%

Pass

       
 

Total Score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Freeport-McMoRan last year, the company has given back the point it earned from 2010 to 2011. A big drop in revenue is responsible for the decline, which also kept the stock near flat-line levels over the past year.

As its name suggests, Freeport-McMoRan is a giant in copper and gold production. That gives the company exposure to two promising trends. On one hand, gold has become much-prized as an investment holding, with SPDR Gold ( GLD 0.84% ) and other ETFs accumulating thousands of tons of the yellow metal. Meanwhile, copper is far less valuable, but is much more important for its industrial uses, playing a key role in construction and infrastructure projects. The combination makes Freeport a formidable force during economic expansions.

As growth has slowed in once-hot areas like China, though, Freeport and its peers have suffered. Both Freeport and mining rivals Southern Copper ( SCCO -0.87% ) and Rio Tinto ( RIO -4.37% ) saw substantial declines in the early part of this year, as Chinese growth projections fell. When China announced a stimulus package of about $150 billion, though, both companies soared in response. Yet, even with those gains, Freeport is dealing with higher costs of production, as well as lower byproduct revenue. Just as Thompson Creek Metals ( TCPTF ) has seen project costs for its Mt. Milligan mine soar, Freeport is having to deal with increasing costs, as well.

But, despite recent disappointments at its Grasberg mine in Indonesia, Freeport has the potential to become much more profitable in the future. The company expects Grasberg to cut its net cash costs dramatically in the next two years and to have negative costs net of byproduct sales soon thereafter. Moreover, with the company making big capital expenditures in areas like the Democratic Republic of the Congo, future growth could send share prices soaring even higher.

For Freeport to improve, it needs economic growth to restore revenue to its past levels. Once that happens, Freeport could become a perfect stock in a very short time.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Freeport-McMoRan to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
FCX
$36.56 (-1.46%) $0.54
SPDR Gold Trust Stock Quote
SPDR Gold Trust
GLD
$166.63 (0.84%) $1.39
Thompson Creek Metals Company Inc. Stock Quote
Thompson Creek Metals Company Inc.
TCPTF
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$61.33 (-4.37%) $-2.80
Southern Copper Corporation Stock Quote
Southern Copper Corporation
SCCO
$58.18 (-0.87%) $0.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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