Freeport-McMoRan Copper and Gold (FCX) is the world's largest publicly traded copper company, and it also explores for and produces other resources like gold, silver, copper, cobalt, etc. This stock has been declining due to weakening prices for copper and a concern that China is facing a hard landing. China is one of the world's largest markets for copper, which is frequently used in construction, electronics, electric motors and many other applications. A slowdown in construction and manufacturing in China or other major countries could create more downside for copper and shrink profit margins for producers like Freeport. Another reason this stock is down is because of recent weakness in the price of gold. Some investors feel that the need for gold has diminished since the situation in Greece has recently been stabilized. However, there is reason to believe that the current weakness in copper and gold are just temporary in nature, and this could be another great opportunity to buy copper and gold producers on the cheap. Here are 7 reasons to consider buying Freeport-McMoRan Copper and Gold shares while it is still well off the 52-week high:
1) A leading investment banking firm has selected Freeport McMoRan Copper and Gold as one of its top picks for 2012. Some analysts believe the stock has upside of about 65%. With the stock now trading at the low end of the trading range, these shares appear to have more upside than downside. The analysts at Barclays believe that copper prices will surprise to the upside in the future.
2) Freeport-McMoRan Copper and Gold are poised to benefit from an eventual rebound in copper prices. Recessions don't last forever, and over time, the recession in Europe and weak demand from other countries is likely to rebound. Furthermore, China is still seeing significant growth, and it is expected to post a gain of about 7.5% in economic output for 2012. A number of major copper producers are more bullish than some investors appear to be on this sector, and they are predicting growth in Chinese copper demand later this year.
3) Freeport-McMoRan is also going to benefit from the continuing bull market in gold. Precious metals like gold have been rising every year for the past several years, and there is every reason to believe that the uptrend is going to continue in the future. Gold stocks make sense for investors who want to benefit from rising gold prices and shield their portfolios from potential inflation and the loose money policies by central banks. Governments continue to print money, and that means investors are likely to keep buying hard assets like oil and gold stocks. A number of analysts and even the CEO of a leading mining company expect gold to push towards $2,000 per ounce as inflation hits the economy sooner or later. This stock could see major gains from the currently low levels once gold breaks the $2,000 barrier.
4) Freeport-McMoRan is a major company with about $21 billion in annual revenues. It also has a solid balance sheet with about $4.8 billion in cash and around $3.5 billion in debt. This company has a strong enough balance sheet to ride out any current weakness in the copper markets, and come out strong when prices rebound.
5) The current share price appears to be an opportunity to buy cheap for a longer-term recovery. With Freeport-McMoRan's stock trading close to $38 per share, it's now well below the 52-week high of $58.75 per share. With Freeport-McMoRan shares at these levels, the price to earnings ratio is now around 7 times forward earnings. The average stock in the S&P 500 Index trades for over 12 times earnings, so these shares would see significant gains, if it just reached the market average.
6) The company has been reporting solid profits: Net income for the year 2011 was $4.6 billion, or $4.78 per share, which compares favorably with $4.3 billion, $4.57 per share, for the year 2010. With both gold and copper potentially climbing higher over the next couple of years, this stock is a way for investors to leverage any future price increases in gold and copper.
7) Freeport-McMoRan shares pay a dividend of $1 per share, which offers a yield of 2.6%. The average stock in the S&P 500 Index is yielding about 2%, so this stock actually pays investors a decent return while waiting for a higher share price. Furthermore, earnings estimates are about 4 times higher than the dividend, which means the dividend appears very safe and could easily rise in the future.
Here are some key points for FCX:
Current share price: $38.85
The 52 week range is $28.85 to $58.75
Earnings estimates for 2012: $4.15 per share
Earnings estimates for 2013: $5.36 per share
Annual dividend: $1 per share which yields 2.6%
Longer-term investors should consider adding this stock, especially on weakness. It's also worth looking at Southern Cooper Corporation (SCCO), which is a leading copper mining, and refining company with operations in Peru, Mexico, and Chile. This stock makes Freeport-McMoRan shares look undervalued as well, since Southern Copper is a smaller company, with less diversification, and it trades at a much higher price to earnings ratio at about 11 times forward earnings.
Here are some key points for SCCO:
Current share price: $31.19
The 52 week range is $22.58 to $41.17
Earnings estimates for 2012: $2.56 per share
Earnings estimates for 2013: $2.80 per share
Annual dividend: 76 cents per share which yields 2.5%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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