Global

Dissecting the Numbers for Freeport-McMoRan Inc. (FCX) and Omnicom Group Inc. (OMC)

Freeport-McMoRan Inc. (NYSE:FCX) shares are down more than -28.38% this year and recently decreased -0.37% or -$0.05 to settle at $13.58. Omnicom Group Inc. (NYSE:OMC), on the other hand, is down -4.83% year to date as of 09/13/2018. It currently trades at $69.31 and has returned 0.09% during the past week.

Freeport-McMoRan Inc. (NYSE:FCX) and Omnicom Group Inc. (NYSE:OMC) are the two most active stocks in the Copper industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity 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 17.60% annual rate over the next 5 years. Comparatively, OMC is expected to grow at a 7.03% 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 15.63% for Omnicom Group Inc. (OMC). FCX’s ROI is 11.30% while OMC has a ROI of 19.50%. The interpretation is that OMC’s business generates a higher return on investment than FCX’s.

Cash Flow



Cash is king when it comes to investing. FCX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, OMC’s free cash flow per share was -0.64. On a percent-of-sales basis, FCX’s free cash flow was 4.59% while OMC converted -0.94% 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 are important because they reveal the financial health of a company. FCX has a current ratio of 2.70 compared to 0.90 for OMC. This means that FCX can more easily cover its most immediate liabilities over the next twelve months. FCX’s debt-to-equity ratio is 1.17 versus a D/E of 2.11 for OMC. OMC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FCX trades at a forward P/E of 12.14, a P/B of 2.08, and a P/S of 1.05, compared to a forward P/E of 11.97, a P/B of 6.77, and a P/S of 1.02 for OMC. FCX is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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 -29.31% to its one-year price target of 19.21. Comparatively, OMC is -6.59% relative to its price target of 74.20. This suggests that FCX is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. FCX has a beta of 2.50 and OMC’s beta is 1.07. OMC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. FCX has a short ratio of 1.37 compared to a short interest of 11.14 for OMC. This implies that the market is currently less bearish on the outlook for FCX.

Summary

Freeport-McMoRan Inc. (NYSE:FCX) beats Omnicom Group Inc. (NYSE:OMC) on a total of 10 of the 14 factors compared between the two stocks. FCX is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. FCX is more undervalued relative to its price target. Finally, FCX has better sentiment signals based on short interest.

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