Is Freeport-McMoRan Undervalued Right Now?
Whether you like it or not, buying a cyclical stock like Freeport-McMoRan (NYSE: FCX), a copper miner, always implies taking a view on the future direction of prices for the metal -- even if that view is "no view." In other words, even if you've decided not to guess where the price is headed and plug in the current price, you are still assuming the direction of the price. However, you can decide whether to buy the stock on a risk/reward calculation that assumes the current price. On that basis, I think Freeport-McMoRan is undervalued. Here's why.
The price of copper, like most commodities, is volatile. In the past decade, it's been as low as $1.90 per pound in the commodities slump of 2016 and around $2 per pound during the worst of the lockdowns in the spring of 2020. It soared to almost $4.80 per pound as the economy recovered in the spring of 2021, then rose more to nearly $4.90 at the onset of the conflict in Ukraine, before slumping on recession concerns. It has now settled at about $3.70.
Of course, the price movements have a significant impact on the profitability of Freeport. For example, management believes the company currently has earnings before interest, taxation, depreciation, and amortization (EBITDA) sensitivity of $430 million for every $0.10 per pound move in the price of copper. Putting that into context, if the price of copper falls by $1 per pound in a year, then Freeport's EBITDA will be reduced by $4.3 billion and vice versa. For reference, Freeport's EBITDA was around $10 billion in 2021.
Source Fool.com
