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Critical Comparison: Freeport-McMoRan Inc. (FCX) vs. Xerox Corporation (XRX)

Freeport-McMoRan Inc. (NYSE:FCX) shares are down more than -5.80% this year and recently decreased -1.81% or -$0.33 to settle at $17.86. Xerox Corporation (NYSE:XRX), on the other hand, is down -4.87% year to date as of 06/12/2018. It currently trades at $27.73 and has returned 0.18% during the past week.

Freeport-McMoRan Inc. (NYSE:FCX) and Xerox Corporation (NYSE:XRX) are the two most active stocks in the Copper industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect FCX to grow earnings at a 23.61% annual rate over the next 5 years. Comparatively, XRX is expected to grow at a 2.00% annual rate. All else equal, FCX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 12.44% for Xerox Corporation (XRX). FCX’s ROI is 11.30% while XRX has a ROI of 5.70%. The interpretation is that FCX’s business generates a higher return on investment than XRX’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. FCX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.66. Comparatively, XRX’s free cash flow per share was +0.54. On a percent-of-sales basis, FCX’s free cash flow was 5.83% while XRX converted 1.34% of its revenues into cash flow. This means that, for a given level of sales, FCX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. FCX has a current ratio of 2.30 compared to 1.70 for XRX. This means that FCX can more easily cover its most immediate liabilities over the next twelve months. FCX’s debt-to-equity ratio is 1.34 versus a D/E of 0.99 for XRX. FCX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FCX trades at a forward P/E of 15.05, a P/B of 2.99, and a P/S of 1.46, compared to a forward P/E of 7.51, a P/B of 1.27, and a P/S of 0.68 for XRX. FCX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. FCX is currently priced at a -12.96% to its one-year price target of 20.52. Comparatively, XRX is -28.53% relative to its price target of 38.80. This suggests that XRX is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. FCX has a beta of 2.47 and XRX’s beta is 1.19. XRX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. FCX has a short ratio of 2.18 compared to a short interest of 1.84 for XRX. This implies that the market is currently less bearish on the outlook for XRX.

Summary

Xerox Corporation (NYSE:XRX) beats Freeport-McMoRan Inc. (NYSE:FCX) on a total of 7 of the 14 factors compared between the two stocks. XRX is growing fastly. In terms of valuation, XRX is the cheaper of the two stocks on an earnings, book value and sales basis, XRX is more undervalued relative to its price target. Finally, XRX has better sentiment signals based on short interest.

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