Freeport-McMoRan Inc (NYSE:FCX) has been beaten down almost constantly for the last five years, and is down over 90% from its 2011 peak. A copper miner that diversified into oil and gas, FCX stock has been the victim of a commodity crash that has gutted both sides of its business.
But after Freeport-McMoRan posted deep losses in every single quarter last year, things may be turning around; The commodities giant is on track to return to profitability in the second half of this year.
Yes, some of the savings have been painful to achieve. For instance, FCX stock slashed its dividend from 31.25 cents a quarter to just 5 cents last year, then suspended it entirely It also has announced reductions in both production and capex targets for both 2016 and 2017 as it digs in and cuts costs.
However, long-term investors have started to ask themselves just how much worse it can actually get for FCX — and whether the stock may be a buy now that it has bounced back about 40% from its 2016 lows.
FCX Stock Investors Need to Take a Very Long View
Let’s start by admitting the obvious: There is no substantial relief for Freeport stock on the way in the near term. Freeport-McMoRan Inc. is a materials company that will live and die based on commodity prices, and the downward pressure on both metals and energy has been consistent and shows no sign of abating.
In mining, FCX stock has good company, with BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE) losing 56% and 66%, respectively, in the last year. And in energy, you don’t have to look far to see other exploration names that are suffering — with Chesapeake Energy Corporation (NYSE:CHK) the ugliest, down 90% in the last 12 months.
This is, indeed, a miserable environment for a stock that focuses on either of these areas. However, the longer you look, the better FCX stock does appear.
After all, while the company indeed posted deep losses last year, it is projecting 35 cents in EPS for fiscal year 2016. And while Freeport’s total debts of more than $20 billion overwhelm its $6 billion market cap, keep in mind this is not a tech company with nothing but software and intellectual property. Its total assets are a hefty $46.6 billion in large part because it owns plenty of machinery, property and resource reserves.
This may be a company in trouble, then, but not one on the verge of bankruptcy.
It’s also worth noting that after the ill-advised move into energy back in 2012 caused havoc, activist investor Carl Icahn has entered the fray with a bold plan to break up the company and perhaps remove those troubled energy businesses from FCX with a breakup, spin-off or sale.
You can do much worse as an investor than rely on Carl Icahn to squeeze value out of your position.
Expect Volatility in Freeport-McMoRan Inc.
On balance, then, Freeport-McMoRan Inc. isn’t quite as bad as its ugly stock chart would have you believe.
Freeport stock trades at a 20% discount to its book value and at just six times 2017 earnings. That seems to add up to a decent long-term value play.
Of course, “long term” is the key. Bold investors who aren’t afraid of the volatility in the near-term may be rewarded 18 months down the road, but it seems very unrealistic to expect anything even close to smooth sailing for Freeport stock in 2016. Aside from its particular history and challenges, all commodity stocks are having a rough go of it, and the market at large is going haywire.
Stock up on antacid, then, if you’re thinking of taking a flier on FCX stock. It’s a risky bet, but may be one that pays off for those who follow Carl Icahn into this battered mining and energy play.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
