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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Freeport McMoran

April 27th 2012 Freeport McMoran
NYSE Symbol: FCX
Industry: Copper & Gold
Price as of April 27th: $38.13

The earnings keep flooding in much better than expected which is a good sign for the markets. Tech continues to shine led by Apple up 10% on Wednesday following earnings. The Nasdaq rose 3.5% Wednesday through Friday. The financials also continue to hold up well, but not all stocks are reporting blow out earnings. A number of energy, material, and industrial stocks are making cautious comments about future growth coming out of Asia and Europe. Just this week Caterpillar, Cliffs Natural Resources, Dow Chemical, Potash, Exxon, and Tennant reported disappointing earnings and cautious guidance regarding global growth. Having said that, these stocks and sectors have priced in a lot of bad news. Eventually, money will rotate into the weaker stocks and sectors thanks in part to attractive dividend yields. This week we'll feature a material stock with a dividend yield over 3%. The featured stock of the week is the largest copper producer in the world, Freeport McMoran. Freeport and copper in general are leading indicators for economic growth which makes this a contrarian play. The recent weakness in global growth, particularly China, and a strike at Freeport's large mine in Indonesian has pushed many investors to the sidelines. Freeport's stock is down 30% from last summer's highs while the price of copper has declined 19% in the last year. But longer term, the world needs more copper and Freeport will be the main benefactor. The recent weakness in Freeport's stock has pushed the dividend yield over 3% providing good long term value for investors looking for a blue chip material stock with plenty of exposure to the most rapidly growing areas of the world.

The Phoenix based company reported net income of $764 million, or 80 cents a share. That compares with $1.5 billion, or $1.57 cents per share, in the year-ago quarter. The miss in earnings were largely due to a strike and halt in production of their largest Indonesian mine. Freeport temporarily stopped operations at the Grasberg mine in Indonesia in February after violence related to a labor strike broke out. The strike and halt to production contributed to a 57 percent drop in copper production. Revenue fell 19 percent to $4.61 billion from $5.71 billion as sales declined for copper, gold and molybdenum. Average prices for copper and molybdenum declined in the quarter while prices for gold rose. Excluding one-time items, Freeport-McMoRan reported 96 cents a share. Going forward, Freeport is optimistic about restoring full operations in Grasberg mine in the second quarter. Management also remains confident about growth coming out of Asia and in particular, China. At the end of the first quarter, Freeport's consolidated cash totaled $4.5 billion, which exceeded its total debt of $3.5 billion. During the quarter, Freeport sold $3 billion in senior notes at rates around 3% allowing the company to use the proceeds to reduce higher cost debt.

The recent halt to production has cut earnings estimates for Freeport, but even with the recent downward earnings revisions, Freeport's stock still looks attractive. Freeport is trading for 9.5 times earnings, 7.4 times next years earnings and 1.8 times sales. The stock also trades for 2.2 times book value of $17 a share. The company has done a great job of structuring and paying off their debt. Thanks to management's moves, the company has more cash than debt and continues to generate billions in cash flow. With the billions in cash flow, the company has returned more money to shareholders reinitiating a dividend in 2010 and hiking it 4 times along with a 2 for 1 stock split since then. The current yield of 3.3% should provide good downside protection if the markets further correct in the coming months. Longer term, Freeport is one of the best positioned stocks to benefit from global growth.