Is Freeport-McMoRan Stock Fairly Valued After 7x Rise?
Despite Freeport-McMoRan stock (NYSE: FCX) having increased more than 7x, or over 600%, since its March 2020 lows, at the current price of a little over $36, FCX stock still appears to be undervalued. FCX stock has rallied from $5 to $36 off its recent bottom compared to the S&P 500 which increased 90% from its recent lows. The stock was able to beat the broader market since March 2020 as gold prices have shot up significantly and remained elevated during the pandemic, while copper prices, which had dropped after the outbreak of coronavirus, have also recovered at a significant pace with stimulus measures announced by various economies. However, gold prices have remained volatile recently and, in fact, have declined from over $2,000/ounce in August 2020 to about $1,800/ounce in July 2021. Though gold prices are down, FCX’s revenue will see a sharp rise in 2021 due to higher output from Indonesia. Additionally, with copper prices expected to remain elevated as vaccine coverage widens, infrastructure spending increases, and economic recovery accelerates, we believe FCX stock still has an upside of about 15% from its current levels. Our dashboard Freeport (FCX) Stock Has Gained 254% Since 2018 provides the key numbers behind our thinking.
All of the stock price rise between 2018 and 2020 is justified by the 240% rise in Freeport-McMoRan’s P/S multiple. FCX’s revenues during this period, in fact, went down 24% from $18.6 billion in 2018 to $14.2 billion in 2020. FCX’s revenues primarily declined as gold and copper production saw a sharp decline after 2018 on the back of negligible output from the Indonesian Grasberg mine which was undergoing a transition from an open pit to underground mine. However, with the transition nearing an end and with gold and copper prices shooting up in late 2020, FCX is expected to see a sharp rise in production, shipments, revenue and margins in 2021. This has led to a spike in the P/S multiple from 1x in 2018 to little less than 3x in 2020. The multiple has further gone up in 2021 and currently stands at 3.3x. We believe the company’s P/S multiple is likely to remain elevated in the near term while higher revenue will drive the stock up.
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The global spread of coronavirus and lockdowns in various cities, which affected industrial and economic activity, led to a sharp drop in copper prices while gold prices rallied. Additionally, production slowed down. This was reflected in the company’s Q1 and Q2 2020 results where FCX revenues declined by 26% and 14%, respectively (on a y-o-y basis). FCX saw some recovery in the second half of 2020 due to increased copper shipments and higher gold and copper prices.
The gradual lifting of the lockdowns has seen a sharp recovery in copper prices over recent months. Copper prices seem to have increased significantly from $2.10/pound in March 2020 to almost $4.23/pound in July 2021. However, the gold rally also seems to have come to a halt after the price increased from $1,500/ounce at the beginning of 2020 to over $1,950/ounce in September 2020. The price currently stands at $1,800/ounce. The actual movement in commodity prices and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel.
Despite gold prices remaining subdued, FCX’s revenues and margins are expected to see sharp improvement in 2021 as most of the company’s revenues are contributed by copper. With investor focus having shifted to 2021 and 2022 numbers, we believe expectations of healthy growth in top and bottom line, higher shipments, and elevated copper prices will drive the stock even higher, notwithstanding the sharp rise over recent months. We believe FCX stock has the potential to rise to $40 per share, reflecting an upside of about 15% from its current levels.
While FCX stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Compass Minerals vs Southwest Gas shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.
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