Will Freeport Stock Recover To Pre-Inflation Shock Highs Of $52 Per Share?

Freeport-McMoRan (FCX)  stock (NYSE:FCX) currently trades at $37 per share, about 28% below its pre-inflation shock high of about $52 seen on March 27, 2022. Freeport is one of the world’s largest producers of copper and copper prices have been subdued this year, amid concerns about rising interest rates,  turmoil in the banking sector, as well as weaker-than-expected demand growth post the reopening of the Chinese economy following the easing of Covid-19 restrictions.  Copper prices have declined from around $4.20 per pound earlier this year, to about $3.50 per pound as of earlier this month, although they have recovered a bit since. Moreover, costs of copper production have also been higher than anticipated, due to export duties in Indonesia as well as higher energy costs.  This is likely to impact Freeport’s earnings considerably this year, with consensus estimates projecting an over 35% decline in earnings per share. That said, there are a couple of factors that could help Freeport, including the Chinese government’s move to shore up the economy and signs that U.S. inflation is tapering off, with consumer prices for October remaining essentially flat month over month.

Looking at a slightly longer term, FCX stock has shown gains of 40% from levels of $25 in early January 2021 to around $35 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in FCX stock has been far from consistent. Returns for the stock were 60% in 2021, -9% in 2022, and -2% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that FCX underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, RIO, and SHW, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FCX face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? Returning to the pre-inflation shock level means that Freeport stock will have to gain about 40% if the stock recovers from $37 currently to its pre-shock highs of $52 per share. While it’s possible that the stock may recover to those levels, we presently estimate Freeport valuation to be around $46 per share, about 24% ahead of the current market price.  Our detailed analysis of Freeport’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how FCX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

FCX and S&P 500 Performance During 2007-08 Crisis

FCX stock declined from nearly $56 in October 2007 to $15 in March 2009 (as the markets bottomed out), implying that the stock lost over 70% of its value through the drawdown. However, the stock rebounded strongly to over $40 by early 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

FCX Fundamentals Over Recent Years

Freeport’s revenues have risen from around $14 billion in 2019 to $22.8 billion in 2022, driven by higher copper and gold price realizations. While the company posted a net loss of about $0.17 per share in 2019, the metric rose to about $2.40 per share for 2022. The company’s financial position also appears to be reasonable. As of the most recent quarter, the company had a debt load of about $9.5 billion, while its total cash position stood at $6.7 billion. 

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, Freeport stock has the potential for gains once fears of a potential recession are allayed.

[1] Month-to-date and year-to-date as of 11/29/2023
[2] Cumulative total returns since the end of 2016

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