Freeport-McMoRan: Copper’s Rally Helps, But Shares Near Fair Value (NYSE:FCX)

Copper prices shot up to 3-month highs at the end of last week as a strong stretch for both precious and industrial metals pressed on. Decent industrial production data out of China in mid-November helped get the rally on its feet, and some dovish comments lately out of the US Federal Reserve provide another macro tailwind. The pop in copper undoubtedly helps one of the world’s largest copper producers, Freeport-McMoRan (NYSE:FCX).

I have a hold rating on the stock, though. I see shares near fair value while the share-price momentum remains in question.

Copper Rises To Multi-Month Highs

For background, FCX operates mines in North America, South America, and Indonesia. It primarily explores copper, gold, molybdenum, silver, and other metals, as well as oil and gas. The company’s assets include the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, and Miami in Arizona; Tyrone and Chino in New Mexico; and Henderson and Climax in Colorado, North America, as well as Cerro Verde in Peru and El Abra in Chile.

The Arizona-based $56 billion market cap Copper industry company within the Materials sector trades at a moderate 24.2 forward non-GAAP price-to-earnings ratio and pays a low 0.8% dividend yield. Ahead of earnings next month, shares feature a somewhat high 29% implied volatility percentage and short interest on the stock is modest at just 1.2% as of December 1, 2023.

Back in October, FCX reported a strong Q3 with non-GAAP EPS of $0.39, beating the consensus estimate of $0.33. Revenue rose more than 16% from year-ago levels, topping analysts’ forecasts by $320 million. Higher copper sales volume drove the bottom-line beat while the company’s FY 2023 guidance was taken modestly higher.

On the downside, the management team also raised its outlook on unit net costs as a result of export conditions in Indonesia. Overall, adjusted EBITDA came to $2.2 billion while net debt of $3.0 billion remains a concern. What’s more, the firm did not conduct any share repurchases last quarter. Capex for the year is now seen at near $4.8 billion, potentially pressuring free cash flow.

Key risks for Freeport include a weaker global economy next year, operational hiccups across its mines around the world, challenges keeping costs in check, and unfavorable regulatory changes.

FCX 3Q23 Highlights

On valuation, analysts see earnings falling more than 33% this year, but then bouncing back by nearly 20% in FY 2024. Non-GAAP EPS could approach $2.50 by 2025 while sales growth is seen remaining somewhat sluggish in the low to mid-single digits over the next several quarters.

Analysts have been lowering their outlooks, though, with 11 EPS downgrades over the last handful of weeks. Still, the firm may be a beneficiary of falling interest rates since October given its net debt position. With free cash flow per share of just $0.36 over the past four quarters, cash flows are not a source of comfort for quality-focused investors looking at FCX.

Freeport-McMoRan: Earnings & Valuation Outlooks

If we assume EPS normalized EPS of $2.50, near the current FY 2025 consensus figure, and apply a sector median P/E of 15.6, then shares should trade near $39, close to the closing price last week. Additionally, FCX’s EV/EBITDA multiple near 8.5 is close to its long-term average, making shares about fully valued today. Of course, if copper and molybdenum prices keep climbing, higher per-share profits could be in store.

FCX: Generally High Valuation Metrics

Compared to its peers, Freeport features a relatively poor valuation grade by Seeking Alpha’s Quant Factor system. Its recent growth history is likewise weak, and EPS revision trends are downright ugly across the industry. FCX does, however, feature robust profitability, but I would like to see improved free cash flow and costs come under better control. With neutral (at best) share-price momentum, the technicals could use some improvement, too.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Wednesday, January 24 BMO. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

FCX features a mixed chart. Notice in the graph below that shares peaked in early 2022 at close to $52 before plunging by more than 50% to a low under $25 in July last year. A rebound high of $46.73 marked a lower peak, and then $33 proved to be support for a downward move during the first half of this year. Yet another lower high was put in around $45 this past summer, but $33 brought about buyers again just a few weeks ago, making for a bullish double-bottom pattern.

With the RSI momentum reading surging to its highest reading since early this year, the bulls were able to take FCX through its falling 200-day moving average. I would not be surprised to see the stock continue its ascent into the end of the year, but the downtrend resistance line comes into play in the low $40s, capping potential upside. Moreover, a high amount of volume by price up to $40 remains a risk, but if the stock can climb above the July zenith, then a bullish technical case would be stronger.

Overall, there are mixed signals on the chart, further underscoring a neutral rating on FCX.

FCX: Bearish Downtrend Line In Play, $33 Support

The Bottom Line

I have a hold rating on Freeport-McMoRan. I see shares near fair value following a decent Q3 and as copper prices climb. The technicals, meanwhile, suggest some caution, but support is near $33.