Has Freeport-McMoRan Become the Perfect Stock?
Nov 11th 2011 9:59AM
Updated Nov 11th 2011 10:24AM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Freeport-McMoRan Copper & Gold (NYS: FCX) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Freeport-McMoRan.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||31.7%||Pass|
|1-Year Revenue Growth > 12%||24.1%||Pass|
|Margins||Gross Margin > 35%||56.9%||Pass|
|Net Margin > 15%||24.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||19.6%||Pass|
|Current Ratio > 1.3||3.37||Pass|
|Opportunities||Return on Equity > 15%||43.1%||Pass|
|Valuation||Normalized P/E < 20||5.63||Pass|
|Dividends||Current Yield > 2%||2.6%||Pass|
|5-Year Dividend Growth > 10%||8.7%||Fail|
|Total Score||9 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Freeport-McMoRan last year, the miner has inched closer to a perfect 10. A drop in shares combined with a dividend increase pushed the stock's yield up significantly, and even with recent fluctuations in copper prices, the company still seems to be firing on all cylinders.
As its full name suggests, Freeport has long benefited from the steady rise in gold and copper prices in recent years. But between August and early October, copper prices fell from around $4.50 per pound to just above $3, sending shares of both Freeport and rivals Southern Copper (NYS: SCCO) , Ivanhoe Mines (NYS: IVN) , and Taseko Mines (ASE: TGB) down sharply. Despite a rebound in the stock market, copper prices remain somewhat subdued.
The company faces other ongoing challenges as well. Along with Newmont Mining (NYS: NEM) , Freeport has seen labor-related strife eat into production at its Grasberg facility in Indonesia, as workers seek huge increases in wages. Yet Southern Copper, which saw some production challenges as well, still managed to post good results, and long-term demand for copper seems healthy. That showed up in Freeport's earnings report as well, in which third-quarter earnings beat analyst expectations despite falling short of last year's levels.
To get that last elusive point, Freeport will need to continue its history of recent dividend growth. That in turn is dependent on metals prices. If copper, gold, and molybdenum demand remains high, then Freeport could reach perfection in the near future.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Freeport-McMoRan. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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