Trade Idea: Call spread on FCX. Courtesy of Daniel Jones at Options Notions.
There was no shortage of interesting market action last week — if you were an oil investor, watching the price of a barrel of crude fall 13% in one week was pretty exciting. Some of that commodity’s price action was tied to a stronger dollar, however more of it seemed due to the easing of tensions between Iran, Israel and the USA. We saw some positive movement in our long refiner positions, Valero (VLO) and Tesoro (TSO). We also saw the tightness of the trading range on last week’s pick Transocean Offshore (RIG) intensify. We’re still looking for that one to break to the downside although earnings are coming up. We will publish their earnings and our reaction to them in early August on the OptionsNotions "Ning" site. If you haven’t visited yet, Ning is our social networking site for discussing our picks and exchanging Q & A about the newsletter’s topics.
Today we’re looking at our friends in the copper and minerals sector, Freeport MacMoran – symbol FCX. Freeport has been in our pages in the past, with an upside call spread, and we’re going there again. We think FCX is one of the premier companies, well positioned to participate in global demand for industrial minerals, particularly copper. Over the last few weeks, FCX has sold off, as perceptions of a global recession clouded investor’s expectations for the firm’s future. We don’t see much of a slowdown for FCX’s products, and our outlook is for the share price to rise in the near future.
The chart above shows FCX shares for the last six months. The stock has pulled back about 20% lately, as investors priced in expectations of a possible global industrial slowdown or recession.
The Relative Strength Index (RSI) and Moving Average Convergence / Divergence (MACD) stochastic lines have rounded at medium-level oversold areas. Both are turning upwards, in our opinion.
FCX Fundamental Data:
Current Price: $105.30
Shares Outstanding: 383 million
Market Cap: $40.4 billion
Forward Price / Earnings (Avg. Est): 8.0x
PE/G Ratio (5-Year Expected): 2.0x
Price / Book: 2.6x
Freeport-McMoRan Copper & Gold, Inc. engages in the exploration, mining, and production of mineral properties primarily in Indonesia, North America, South America, and Africa. It focuses on copper, gold, molybdenum, and silver prospects.
As of December 31, 2007, FCX had total consolidated recoverable proven and probable reserves of approximately 93.2 billion pounds of copper; 41.0 million ounces of gold; 2.0 billion pounds of molybdenum; 230.9 million ounces of silver; and 0.6 billion pounds of cobalt. Freeport-McMoRan Copper & Gold, Inc. was founded in 1987 and is based in Phoenix, Arizona.
FCX has enjoyed the price rise of copper, gold and other precious metals that has occurred over the last few years. Although slowing from the torrid growth of 2007, FCX continues to see growth in revenue, posting the types of numbers that attract serious investors, especially in their profit margins. Comparing year-on-year revenue numbers, FCX’s annual revenues are expected to rise to $23.0 billion during 2008, a gain of over 37% from last year’s full year figure of $17.0 billion. At the bottom line, analysts are expecting earnings of $11.70 per share for the full year 2008, up from $9.74 per share earned in the full year 2007.
These earnings estimates, as well as the quarterly estimates of 2Q08 of $2.43 per share, have been stable over the last sixty days. Stable copper prices have contributed to that stability, which tend to drive the share price of FCX on a day-to-day basis. We think that Freeport’s shares represent reasonable value from a price / earnings ratio perspective. A price chart of Copper’s spot price is included below for reference:
Freeport’s balance sheet has $1.8 billion in cash, or about $4.75 per share. The debt they carry though, primarily from an acquisition completed in 2007, amounts to over $7.6 billion. However the firm’s EBITDA is $10.1 billion on a trailing 12-month basis. The debt service is well covered, and FCX could use that additional cash to raise the current $1.75 per share dividend, or buy back stock.
Recommendation: We recommend investors buy a September call spread in FCX options. We would buy the September $100 calls for $13.50 and sell the September $120 calls for $5.00, for a net cost of $8.50 to this spread. We would look to sell this spread at a price of $17.00 over the next two months, and this ‘trigger’ can be entered with your broker.
For investors only wishing to go long options on this trade, we would look to purchase the Sept 100 calls for $13.50.
Disclosure: Analyst has no position in FCX stock or FCX options, or the commodity copper.
