The FCX stock is overvalued at this point. At $118, Freeport has a market cap of $53 billion. It earned about $3.5 billion over the last 4 quarters and forecasts $3.5 billion free cash flow for 2008. That gives it a multiple around 15[1].
That’s already a decent multiple for a cyclical commodities business, but it also depends on commodity prices remaining sky high. Their 2008 forecast assumes $3.75 copper and $900 gold. Every 20 cent per pound change in the price of copper impacts operating cash flow by $450 million.
So, for example, a 60 cent drop in the price of copper would reduce operating cash flow by $1.35 billion. All of a sudden that 15 forward multiple becomes 25 and the stock is really expensive. Of course, if commodity prices go up the valuation is really cheaper. But I think there’s a very thin margin of error here and if copper prices come down, Freeport will get hammered. We’ll see pressure on copper prices and therefore on Freeport shares.
- ↑ http://www.topgunfp.com/freeport-valuation-bloated-here/
