Freeport Earnings Preview: Stock Trading Below Tangible Book …

Freeport Earnings Preview: Stock Trading Below Tangible Book …

Summary

FCX trading below tangible book value.
The stock has a 6% dividend yield at its current price.
Indonesia continues to be a giant thorn in the side of Freeport management.
Dividend may not be sustainable.
Either capex or the dividend needs to be reduced, after examining free-cash-flow.

Freeport-McMoRan (NYSE:FCX) kicks off the Basic Materials festivities Tuesday morning, January 27th, 2015, releasing their 4th quarter, 2014 financial results before the opening bell.

Analyst consensus is expecting $0.35 in earnings per share (NYSEARCA:EPS) on $4.93 billion in revenues for expected year-over-year declines of 58% and 19% respectively.

In q3 ’14, FCX saw revenues fall 8%, operating income fell 18% and EPS fell 19% as the crude oil decline and the mining operation was hit. At that time of the q3 ’14 earnings report and looking at the revisions post the report, I thought q1 ’15 would be the trough in terms of the earnings per share and revenue declines and I still think that could be the case.

It is surprising how many analysts continued to be bullish FCX through this summer and early fall.

It is no mystery why FCX is struggling: the price of copper has fallen from over $3 to an approximate spot price of $2.5 – $2.60 per pound, and what is probably an even bigger issue, FCX management acquired or merged with MMR (McMoRan Exploration) and PXP (Plains Exploration), placing them squarely in the oil and gas business in the first half of 2013, which was FCX’s way of diversifying their commodity risk. (Doh !)

It is pretty hard to believe both the decision-making at FCX and the string of bad luck the last two years:

1.) FCX management added $17 billion in term debt to merge with Plains and McMoRan, even though the combined company so far is just generating $5 to $6 billion in annual cash flow, up from $3 – $4 billion prior to the combination.

2.) Indonesia, which is home to one of FCX’s major copper mines, i.e. the Grasberg Mine, continues to make life difficult for FCX. The government of Indonesia has extended FCX’s export permit for just 6 months as of this weekend, even though FCX has committed to spending $17 billion in capex in Indonesia. According to our internal spreadsheet, FCX’s annual capex run rate is between $5 – $6 billion in its entirety, so FCX traded a long-term capex commitment for a 6-month export window.

3.) FCX management’s timing and strategic planning is truly something to behold, let alone watching the global currency and commodity markets move against them.

That being said, FCX’s valuation is getting pretty interesting.

At $18 – $19 per share, FCX is trading at 5(x) enterprise value to (NYSE:EV) to operating cash-flow and 3(x) operating cash-flow per share.

Book value is roughly $25 per share while tangible-book value is $23 thus the stock is trading at a 25% discount to those values.

The key question is the dividend: with better than 6% current yield on the stock, and nearly a billion shares outstanding, the annual dividend in total dollars is roughly $1.25 billion, and with free-cash-flow of $1.2 billion (on a 4-quarter trailing basis) FCX is returning more capital to shareholders than free-cash-flow provides, and they still need to pay down that $17 billion in debt over time.

Analyst consensus trends:

Freeport

EPS Consensus Trends

Revenue Consensus Trends

cal

cal

y/y gro

cal

y/y gro

cal

cal

y/y gro

cal

y/y gro

2014

2015

est

2016

est

2014

2015

est

2016

est

1/24/2015

$2.06

$1.62

-21%

$3.45

113%

$21,087

$20,795

-1%

$28,034

35%

dec ’14

$2.12

$2.12

0%

$4.31

103%

$21,276

$22,118

4%

$29,485

33%

nov ’14

$2.13

$2.26

6%

$4.51

100%

$21,308

$22,229

4%

$29,846

34%

oct ’14

$2.20

$2.38

8%

$4.58

92%

$21,674

$22,704

5%

$29,999

32%

july ’14

$2.43

$2.86

18%

$5.07

77%

$22,411

$24,418

9%

$31,610

29%

apr ’14

$2.63

$3.12

19%

$5.03

61%

$23,351

$25,573

10%

$31,109

22%

jan ’14

$2.88

$3.13

9%

$5.18

65%

$23,818

$25,874

9%

$31,552

22%

Dec ’13

$3.22

$3.44

7%

$5.83

69%

$23,938

$25,824

8%

$33,903

31%

# of est’s

20

24

20

22

22

19

* Source: ThomsonReuters current and historical consensus estimates

* FCX’s calendar year ends 12/31

As readers can quickly see, FCX is trading at just over 10(x) the expected 2016 consensus EPS of $1.62 per share. What is interesting to me is to note the sharp decline in EPS estimates just since Jan 1 ’15.

There is truly a world of hurt being incorporated into not just FCX but so many commodity stocks, given the strong dollar, China’s slowdown, and the dearth of any strong global growth.

While I am long less than a 1% position in FCX within client accounts, I would not recommend this stock for readers prior to Tuesday morning’s earnings report. This is higher risk for sure, despite what looks to be rock-bottom valuations.

Management could and should continue to sell assets, but they might be doing so now at fire-sale prices, and while I can’t recall the source I thought I read that one option for FCX was potentially a MLP (master limited partnership) vehicle to hold some of the assets.

Tuesday morning I will be listening for FCX’s free-cash-flow and EBITDA (earnings before interest, taxes, depreciation and amortization) estimates for full-year 2015 not just the EPS and revenue guidance.

Current full-year 2015 estimates are looking for EPS of $1.62 on $20.79 billion in revenues for expected year-over-year declines of -21% and -1% respectively.

If 4th quarter expectations are met exactly FCX will have seen a 23% drop in EPS in 2014 on 1% revenue growth.

There is absolutely no reason to get in front of this stock by Tuesday morning, January 27th. Be patient. I am a lot more interested in how the stock price reacts to the news than the financial report itself. Assume the numbers will be bad, the guidance could be worse.

Source: Freeport Earnings Preview: Stock Trading Below Tangible Book Value, But Is The Dividend Sustainable?

Disclosure: The author is long FCX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)

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Freeport Earnings Preview: Stock Trading Below Tangible Book …

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