Why Freeport-McMoRan Earnings Could Take a Double Hit

Source: Freeport-McMoRan.

The commodity industry has performed horribly for years now, and Freeport-McMoRan (FCX 2.89%) has put itself at the center of the debate about whether commodities will recover in the short run. The company's poor timing in diversifying beyond the copper, gold, and other mined-products realm to embrace energy production at what proved to be the top of the market in crude oil has caused dramatic drops in sales and profits. Coming into Thursday's second-quarter financial report, Freeport will need to reassure hard-hit shareholders that the company can bounce back from tough times in commodities and restore its long-term growth path in order to prevent further damage to its stock price. Let's take a closer look at Freeport-McMoRan and what has happened to send its shares plunging in recent months.

Stats on Freeport-McMoRan

Source: Yahoo! Finance.

Can Freeport-McMoRan earnings start growing again?
Investors have been stunned by the speed of Freeport-McMoran's decline, and their earnings projections have reflected their shock. In recent months, investors have cut their views on second-quarter earnings by 40%, and full-year 2015 and 2016 estimates by a dime per share. The stock has continued its descent, with further losses of about 23% since mid-April.

Freeport-McMoRan's first-quarter results showed just how much the company has suffered from poor conditions in its key markets. The company posted a net loss of $2.5 billion, or $2.38 per share. Even after accounting for a massive impairment charge and other one-time items, Freeport still lost $0.06 per share, reversing a profit of $0.49 per share in the previous year's first quarter. Despite increases in copper and gold sales, Freeport sold less crude oil and molybdenum, and poor realized prices for those commodities weighed on results. The company said that it would cut back on capital expenditures and other outflows temporarily in order to deal with the drop in oil prices, as well as explore the potential of doing an initial public offering or other sale of an interest in its oil and gas business.

Yet as much attention as oil has gotten lately, copper prices have also had a big impact on Freeport's business. Copper dropped for much of the second quarter and more recently has fallen below the $2.50-per-pound mark again this month, reaching new six-year lows and threatening to hit Freeport even harder than its $2.72 average realized price per pound in the first quarter. Similarly, after selling gold at an average price of $1,186 per ounce last quarter, Freeport now must deal with spot gold prices just above $1,100 per ounce.

Perhaps most worrying is Freeport's apparent lack of a long-term strategy that incorporates natural fluctuations in commodity prices. Until 2013, Freeport seemed quite content to ride the wave of metals prices higher. When gold and other metals started to decline, the time seemed ripe for Freeport to add energy exposure in order to diversify its risk. Yet now that Freeport has seen the energy business perform poorly, it has talked about spinning off part of its interest in that business through an IPO or sale. These quick about-faces on major strategic moves indicate a lack of follow-through from Freeport's leadership, and investors need to question whether executives have the resolve to go through the major restructuring that Freeport needs in order to thrive again.

In the Freeport-McMoRan financial report, look to see if the company can provide candid, honest information about its future business prospects. Being optimistic about a company's prospects isn't unusual, but with Freeport, investors really need a more realistic look at the management team's vision and how the company can execute it. Without concrete signs of progress toward a recovery, it'll be tough for Freeport investors to feel terribly confident about the stock bouncing back from its recent losses.