As one of the world's leading producers of copper, Freeport-McMoRan Copper & Gold (FCX) has benefited greatly from emerging market demand; consistently rising gold prices haven't hurt.
Freeport-McMoRan is highly leveraged to the price of gold and copper. Every 10-cent move in copper prices is worth $405 million in earnings, and every $50/ounce move in gold is worth $75 million in earnings.
From a valuation perspective, Freeport-McMoRan appears cheap. The forward P/E is just 7.2. The stock trades for less than two times revenue and book value.
In 2011 Freeport generated over $1 billion in cash after paying its dividend. As it now stands, the dividend represents just 37% of earnings. We believe the current yield is easily sustainable, and even offers some upside.
Of course, there's a very good reason Freeport shares are cheap. In December, Freeport� announced a $9 billion deal to acquire two oil and gas exploration companies, Plains Exploration and McMoRan Exploration.
Now, it's not all uncommon for an acquiring company to take a hit to its share price. That's because there are always challenges in integrating a new company.
In the case of Freeport-McMoRan, investors were clearly a bit worried about an acquisition into a completely new area. Also, most analysts felt the price paid for McMoRan Exploration represented quite a premium over the stock price at the time the deal was announced.
McMoRan Exploration has been having trouble with one of its ultra-deep wells. The situation had gotten so bad that some analysts think the well may may be abandoned.
In our opinion, it is the perception that insiders did this deal to benefit themselves that really knocked the stock down. In that sense, the 15% drop in Freeport shares was an overreaction. It was also an opportunity to acquire shares at an attractive price.
Freeport-McMoRan is like a one-stop shop for global growth. Copper is perhaps the best proxy for growth in emerging markets, especially China. Gold offers the very best hedge against continued monetary stimulus around the world. And the new oil & gas acquisitions will give the company added exposure to growth here in the U.S.
Freeport stock has been depressed for most of 2012 on fears that China's economic slowdown would morph into an all-out crash. But those fears now seem overblown, as China has started to post improving manufacturing numbers. The Chinese economy appears to be growing again, and that will be good for copper.
Freeport's move into oil and gas gives us upside as well. And we can enjoy the $1.25 a share dividend while we wait for the stock to advance. We rate FCX a strong buy under $33 a share. Our 12-month price target is $42.
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