Earnings

Critical Comparison: Freeport-McMoRan Inc. (FCX) vs. Southern Copper Corporation (SCCO)

Freeport-McMoRan Inc. (NYSE:FCX) shares are up more than 4.85% this year and recently increased 1.90% or $0.37 to settle at $19.88. Southern Copper Corporation (NYSE:SCCO), on the other hand, is up 5.58% year to date as of 01/11/2018. It currently trades at $50.10 and has returned 2.79% during the past week.

Freeport-McMoRan Inc. (NYSE:FCX) and Southern Copper Corporation (NYSE:SCCO) are the two most active stocks in the Copper industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect FCX to grow earnings at a 72.42% annual rate over the next 5 years. Comparatively, SCCO is expected to grow at a 21.40% annual rate. All else equal, FCX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 38.81% for Southern Copper Corporation (SCCO). FCX’s ROI is -14.20% while SCCO has a ROI of 9.00%. The interpretation is that SCCO’s business generates a higher return on investment than FCX’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 +0.60. Comparatively, SCCO’s free cash flow per share was +0.15. On a percent-of-sales basis, FCX’s free cash flow was 5.86% while SCCO converted 2.16% 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

Balance sheet risk is one of the biggest factors to consider before investing. FCX has a current ratio of 2.00 compared to 3.00 for SCCO. This means that SCCO can more easily cover its most immediate liabilities over the next twelve months. FCX’s debt-to-equity ratio is 2.12 versus a D/E of 0.90 for SCCO. FCX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FCX trades at a forward P/E of 11.86, a P/B of 4.12, and a P/S of 1.83, compared to a forward P/E of 22.17, a P/B of 5.88, and a P/S of 6.21 for SCCO. FCX is the cheaper 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. FCX is currently priced at a 18.76% to its one-year price target of 16.74. Comparatively, SCCO is 22.2% relative to its price target of 41.00. This suggests that FCX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for FCX and 3.30 for SCCO, which implies that analysts are more bullish on the outlook for SCCO.

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 2.61 and SCCO’s beta is 0.61. SCCO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FCX has a short ratio of 2.05 compared to a short interest of 8.25 for SCCO. This implies that the market is currently less bearish on the outlook for FCX.

Summary

Freeport-McMoRan Inc. (NYSE:FCX) beats Southern Copper Corporation (NYSE:SCCO) on a total of 9 of the 14 factors compared between the two stocks. FCX is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, FCX is the cheaper of the two stocks on an earnings, book value and sales basis, FCX is more undervalued relative to its price target. Finally, FCX has better sentiment signals based on short interest.

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