Southern Copper Stock Recovery Gone Too Far?

We believe there may be better opportunities than Southern Copper Corp stock (NYSE: SCCO) at the present time. SCCO trades at $44 currently and it has gained more than 5% in value so far this year. It traded at a pre-Covid high of $38 in February, and it is 16% above that level now. Also, SCCO stock has gained around 90% from the low of $23 seen in March 2020, as copper prices have shot up significantly over the last few months – rising from $2.10/pound in March 2020 to over $3.00/pound in September 2020. This was following the the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. That said, even as the lockdowns are lifted gradually, copper prices are unlikely to see further upside as it is already above the pre-crisis levels. In view of its rally since March, we believe that the stock has surpassed its potential and is likely to drop around 10% in the near future. Our conclusion is based on our detailed analysis of Southern Copper Corp’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 48% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how SCCO and the broader market performed during the 2007-08 crisis.

Timeline for 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

SCCO vs S&P 500 Performance Over 2007-08 Financial Crisis

SCCO stock declined from levels of around $25 in September 2007 (pre-crisis peak) to levels of around $9 in March 2009 (as the markets bottomed out), implying SCCO stock lost 65% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $21 in early 2010, rising by 145% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

SCCO Fundamentals Over Recent Years Have Been Strong

SCCO revenues grew from $5 billion in 2015 to $7.3 billion in 2019, due to higher output and rising prices. Along with higher revenues, margins improved over recent years with adjusted EPS increasing from $0.93 in 2015 to $1.92 in 2019. However, the company’s Q2 revenues saw a 2% y-o-y decline. Earnings came in at $0.34/share as against $0.52/share in the year-ago period, mainly due to higher cost of production.

Does SCCO Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

SCCO’s total debt increased from $6 billion in 2016 to $6.5 billion at the end of Q2 2020, while its total cash trebled from $0.6 billion to $1.8 billion over the same period. The company also generated $0.9 billion in cash from its operations in the first half of 2020, and it appears to be in a good position to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020:  Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and in view of the strong rally in SCCO’s stock since late March, we believe that the stock has little room for growth in the near future even after factoring in an expected improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. In fact, the stock is likely to drop 10% to below $40 in the near term.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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