Post The Release Of FY2019 Results, Has Freeport-McMoRan’s Stock Reached Its Fair Value?

Freeport-McMoRan (NYSE: FCX) saw its stock price fall by about 7.5% immediately following the announcement of its 2019 earnings on January 23, 2020. Though the company managed to marginally exceed consensus estimate for revenue and earnings (reported revenue of $14.4 billion vs. consensus of $14.3 billion; adjusted EPS of $0.02/share vs. consensus of $0.00/share), markets gave a thumbs down to the stock as the production guidance for 2020 was lower than expectations. However, based on its current market price and future growth prospects, Freeport-McMoRan looks undervalued. Trefis has a price estimate of $14 per share for FCX’s stock, which is higher than its current market price of around $11.29 as of January 29, 2020. This reflects an upside of 20% from its current level.

View the Trefis interactive dashboard  on Freeport-McMoRan’s Valuation that details the factors driving a higher stock price estimate for the company, where you can alter the key assumptions to arrive at your own estimate for FCX’s stock.

Company Overview

• Freeport-McMoRan Inc. (FCX) is involved in the mining, smelting, and refining of copper, gold, and molybdenum. The company runs its mining and smelting operations in North and South America and Indonesia.
• Most of the copper concentrate produced by FCX’s mines is cast into copper rod by the company’s rod and refining operations. Certain mines also produce molybdenum concentrate, gold, and silver.
• The primary competitors include: Newmont Goldcorp, Barrick Gold, Wheaton Precious Metals, BHP Billiton, etc.

Estimating Revenue Growth

• Though FCX’s total revenue increased in 2018, led by strong production output and an increase in global prices of gold and copper, for the full year 2019, revenue decreased by 22.7% from $18.6 billion in 2018 to $14.4 billion in 2019, primarily due to a decline in volume and lower price realization in the company’s copper segment, partially offset by higher gold prices.
• With output expected to remain subdued for one more year as FCX’s production guidance has come in lower than expected, revenue is expected to grow at a modest rate of 4.5% to $15 billion in 2020, primarily led by improved price realization for copper, gold, and molybdenum.
• Once production picks up in 2021, revenue growth is expected to inch close to 20% in 2021.

Copper Revenue

• Though copper revenues have increased from 2016 to 2018 on the back of higher production and elevated global copper price levels, revenue declined by about $2 billion in 2019, compared to 2018, mainly due to a significant drop in revenue from the Indonesian operations.
• The Grasberg mine in Indonesia, which is the second largest copper mine in the world, is currently transitioning from an open pit mine to an underground mine (two-year transition process), which is driving a sharp drop in the production of copper.
• With US-China trade talks progressing and a possible truce in sight, prices increased since the beginning of 2019. However, re-escalation of tensions with the imposition of additional tariffs has led to a drop in global copper prices since April 2019.
• Thus, lower shipments and price realization led to a significant drop in copper revenue in 2019.
• However, revenue is expected to recover to a certain extent in 2020 due to a positive copper price outlook and higher production in the Americas.
• Copper revenue could increase from $8.9 billion in 2019 to $9.5 billion in 2020, with a full recovery to $10.9 billion by 2021.

Gold Revenue

Grasberg is the world’s largest gold mine and contributes almost all of FCX’s gold production (with some gold being contributed as a by-product from the American mines). To see how FCX’s gold segment performed in 2019 and what is the outlook for the next two years, refer to our interactive dashboard analysis – Freeport-McMoRan Revenues: How Does FCX Make Money?

Estimating Net Income

• Net income margin witnessed a significant decline from 14% in 2018 to -1.7% in 2019, mainly due to higher cost per unit (as shipments would decrease) and the absence of any gain on asset sales, unlike in 2018.
• Margins could see a slight revival by reaching about 4% in 2020, due to a pick-up in volume sold and higher revenue.
• However, with volume expected to pick up and reach the pre-transition period number, margin is expected to rise sharply to about 10% by 2021.

Estimating Earnings Per Share (EPS)

• EPS has grown from $1.25 in 2017 to $1.78 in 2018, before dropping to -$0.16 in 2019. We estimate it to be $0.42 and $1.24 in 2020 and 2021, respectively.
• EPS growth in 2020 and 2021 can be attributed to higher Net Income and an almost stable share count.

Share Price Estimation

• As per Freeport-McMoRan’s Valuation by Trefis, we have a price estimate of $14 per share for the company’s stock.
• The stock price estimate is arrived at by using the discounted cash flow valuation technique, which you can find in FCX’s detailed financial model here.
• Based on projected EPS of $0.42 per share and a stock price estimate of $14 per share, Freeport-McMoRan’s forward price-to-earnings (P/E) multiple stands at 33.8x.

To understand how Freeport-McMoRan’s P/E multiple over the years stands in comparison to its major peers, view our interactive dashboard.

See all Trefis Price Estimates and Download Trefis Data here

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