Can COVID-19 Take Freeport-McMoRan’s Stock To $4?

Despite a 34% decline in Freeport-McMoRan’s (NYSE: FCX) stock since the beginning of this year as the spread of the novel Coronavirus rattled the stock markets and the broader economy, at the current price of $9 per share, we believe Freeport-McMoRan has a significant downside if there are no signs of abatement of the crisis in May 2020. FCX stock is already about 50% lower than it was at the beginning of 2018, a little over 2 years ago. We estimate that FCX’s stock price could decline to levels of around $4 (worst-case scenario) if its revenues fall by 30% vs. FY’19, its margins remain negative in 2020 (as it continues paying its staff along with incurring other fixed expenses), and its valuation multiple falls to levels of around 0.6x from about 1.0x at the end of FY’19 and 0.7x currently. Below, we summarize this possible downside case for FCX, which is detailed in our interactive dashboard analysis Freeport-McMoRan Inc Downside: How Low Can Freeport-McMoRan Inc Stock Go?

So what’s the likely trigger and timing to this downside?

• The outbreak and spread of coronavirus is expected to lead to further slowdown in economic activity and demand, in turn leading to global copper prices to remain under pressure. Global copper prices have declined from about $2.80 per pound at the beginning of 2020 to around $2.30 per pound currently. With copper contributing almost 60% of FCX’s revenue, copper prices have a large effect on FCX’s stock. FCX’s Q1 results reflected the impact of the crisis to a certain extent, with the company reporting a 26% drop in total revenues. But we believe FCX’s Q2 results in July will confirm the complete impact of the crisis with a greater hit to its revenue, with the management having already lowered its full-year guidance during the Q1 2020 announcement.
• Specifically, we believe the full-year revenue expectations formed by the market may be closer to $10 billion, about 30% lower than its 2019 revenue of $14.4 billion, and 46% lower than the 2018 revenue of $18.1 billion. Our dashboard shows key components of Freeport-McMoRan’s revenues.
• The market isn’t going to stomach this well, and FCX’s P/S multiple could shrink to about 0.6x from 1.0x seen in 2019 and 0.7x currently.
• The 30% reduction in revenues is unlikely to accompany a proportional reduction in expenses, as compensation expenses and other fixed costs like upkeep of machinery are not expected to see any change. This could result in the net income margin being negative, similar to 2019.
• 30% lower revenue and loss-making operations leading to almost a 15% drop in P/S multiple could translate into FCX’s stock price dropping over 55%, taking it to $4 per share.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and if the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe FCX’s stock price at levels of $7 and below provides a buying opportunity for investors willing to be patient. As per Trefis base-case scenario, Freeport-McMoRan’s valuation works out to $8 per share

See all Trefis Price Estimates and Download Trefis Data here

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