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Investors Are Undervaluing Freeport-McMoRan Inc (NYSE:FCX) By 46.65%

In this article I am going to calculate the intrinsic value of Freeport-McMoRan Inc (NYSE:FCX) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for Freeport-McMoRan

What’s the value?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $1.78k $2.25k $4.05k $4.72k $4.47k
Source Analyst x4 Analyst x7 Analyst x5 Analyst x5 Est @ -5.27%
Present Value Discounted @ 13.87% $1.56k $1.74k $2.75k $2.81k $2.34k

Present Value of 5-year Cash Flow (PVCF)= US$11.2b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 13.9%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$4.5b × (1 + 2.9%) ÷ (13.9% – 2.9%) = US$42.1b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$42.1b ÷ ( 1 + 13.9%)5 = US$22.0b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$33.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $22.91. Compared to the current share price of $12.22, the stock is quite undervalued at a 47% discount to what it is available for right now.

NYSE:FCX Intrinsic Value Export November 7th 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Freeport-McMoRan as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13.9%, which is based on a levered beta of 1.55. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For FCX, I’ve compiled three relevant factors you should further examine:

  1. Financial Health: Does FCX have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does FCX’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of FCX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.