Stock of the Week
NYSE Symbol: FCX
Industry: Copper & Mining
Price as of 9/13: $35.48
After a great start to the year, the commodity space has come under pressure over the summer months as the Delta variant of COVID-19 has slowed economic growth and the reopening of the economic trade. Many commodities like oil, copper, iron ore and lumber all saw pull backs in pricing, but many commodities should rebound into the year end as the economic numbers improve. This week we will highlight a copper play that could benefit from the growing transition to a more "green economy." This week we will highlight one of the largest copper producers, Freeport McMoRan. Freeport's stock has performed well year to date, but a recent 20% pullback could be providing a good entry point for long term investors to benefit from the reopening of the economy and the growing demand for copper.
Copper conducts electricity and there is no good substitute for copper wiring. Copper demand typically rises with new construction and global growth. However, with the world trying to go "green" copper is finding new avenues for demand like electric cars which require four times as much copper as vehicles with internal-combustion engines. Also, onshore wind farms are four times as copper intensive per megawatt as traditional power plants.
Freeport-McMoRan gets about 80% of its revenue from the red metal and has mines on several continents. While prices for the industrial metal has pulled back by more than 10% this summer, an analyst at Jefferies remains upbeat on the commodity, stock and sector. The analyst doesn't see a massive acceleration in demand for copper but does see supply constraints that could result in growing demand outstripping supply.
Freeport McMoRan's stock currently trades for 10 times projected 2022 earnings of $3.50 a share and yields just under 1%. During the pandemic, Freeport did a good job of cutting costs and getting their net debt down to $3.4 billion which should allow them to ramp up dividends and buybacks next year. If demand does outstrip supply in the coming year or two, the Jefferies analyst believes Freeport McMoRan could generate $6 a share in earnings, up from current estimates of $3.50 a share. The analyst also has a price target of $60 a share or 70% above current levels. Copper and Freeport are cyclical stocks, but if demand continues to rebound in the coming years, the stock could perform well for shareholders.