Is Southern Copper Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Southern Copper fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell SoCo's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at SoCo's key statistics:


SCCO Total Return Price Chart

SCCO Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

49.7%

Pass

Improving profit margin

(2.9%)

Fail

Free cash flow growth > Net income growth

(33.8%) vs. 46.6%

Fail

Improving EPS

49.1%

Pass

Stock growth (+ 15%) < EPS growth

17.7% vs. 49.1%

Pass

Source: YCharts. * Period begins at end of Q1 2010.

SCCO Return on Equity Chart

SCCO Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

4.6%

Pass

Declining debt to equity

153.4%

Fail

Dividend growth > 25%

(55.1%)

Fail

Free cash flow payout ratio < 50%

464%

Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
SoCo doesn't quite come through with flying colors, as it's only mustered four out of nine possible passing grades. A big source of that weakness is the company's falling free cash flow, which has diverged markedly from its net income over the past three years, and which may not be able to support its current dividend payouts if the trend continues. Will SoCo be able to turn this weakness around and rebound, or is the copper miner going to be tarnished for some time to come? Let's dig a little deeper.

A major part of SoCo's weakness -- copper prices -- is simply out of its hands, and the trend has not been favorable over the past few years. Since peaking in early 2011, copper prices have fallen back to roughly the same level they reached at the start of our three-year tracking period. SoCo's stock has actually outperformed the slide for a year, but Freeport McMoRan has almost exactly mirrored the movements of copper:

Copper LME Settlement Price Chart

Copper LME Settlement Price data by YCharts

This, at least, seems to indicate a superior position for SoCo over its more diversified rival. SoCo has also been investing heavily in new infrastructure to exploit its assets. In nominal terms, the company's capital expenditures are less than half Freeport's, but run six times as high as smaller competitor Taseko Mines :

SCCO Capital Expenditures Quarterly Chart

SCCO Capital Expenditures Quarterly data by YCharts

Taseko's capex has actually grown at a faster rate during this time, and is now over 540% higher than it was in 2010. SoCo is no slouch, though, and its three-year capex spending growth of 320% puts it on pace to spend roughly $900 million a quarter by 2016. That might be a concern for long-term investors, as none of SoCo's core financial metrics (revenue, profit, or cash flow) have grown at anywhere close to that rate. A rebound in copper prices will certainly help smooth over this imbalance, but there are many near-term concerns that China -- the world's largest copper consumer -- is slowing down. SoCo investors should keep a close eye on Chinese economic reports for a clue to the future of their favorite copper stock.

Putting the pieces together
Today, Southern Copper has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business and, on top of this foray into a new industry, it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.

Keep track of Southern Copper by adding it to your free stock Watchlist.

The article Is Southern Copper Stock Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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