Declining Stock and Solid Fundamentals: Is The Market Wrong About Freeport-McMoRan Inc. (NYSE:FCX)?

It is hard to get excited after looking at Freeport-McMoRan's (NYSE:FCX) recent performance, when its stock has declined 20% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at.

Particularly, we will be paying attention to Freeport-McMoRan's [1] ROE today. Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Freeport-McMoRan [2]

How Is ROE Calculated?

ROE can be calculated by using the formula: Return on Equity = Net Profit (from continuing operations) / Shareholders' Equity So, based on the above formula, the ROE for Freeport-McMoRan is:

15% = US£4.4b / US£29b (Based on the trailing twelve months to June 2024). The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.15 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings.

We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Freeport-McMoRan's Earnings Growth And 15% ROE

To start with, Freeport-McMoRan's ROE looks acceptable. On comparing with the average industry ROE of 9.4% the company's ROE looks pretty remarkable.

This probably laid the ground for Freeport-McMoRan's significant 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Freeport-McMoRan's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 27% in the same 5-year period.

past-earnings-growth Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline).

Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Freeport-McMoRan's's valuation, check out this gauge of its price-to-earnings ratio[3], as compared to its industry. Story continues

Is Freeport-McMoRan Efficiently Re-investing Its Profits?

Freeport-McMoRan's ' three-year median payout ratio is on the lower side at 25% implying that it is retaining a higher percentage (75%) of its profits.

So it looks like Freeport-McMoRan is reinvesting profits heavily to grow its business, which shows in its earnings growth. Besides, Freeport-McMoRan has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 24%. As a result, Freeport-McMoRan's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Summary

On the whole, we feel that Freeport-McMoRan's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return.

This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.[4]

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.[5] This article by Simply Wall St is general in nature.

We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data.

Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Simply Wall St has no position in any stocks mentioned.

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References

1. ^ Freeport-McMoRan's (au.finance.yahoo.com)
2. ^ Check out our latest analysis for Freeport-McMoRan (simplywall.st)
3. ^ this gauge of its price-to-earnings ratio (simplywall.st)
4. ^ visualization of analyst forecasts for the company. (simplywall.st)
5. ^ Get in touch (investor-research.typeform.com)