Freeport-McMoRan vs. Southern Copper: Which Stock is a Better Buy?

Southern Copper Corporation (SCCO) engages in mining, exploring, smelting, and refining copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile. The company is involved in the mining, milling, and flotation of copper ore to produce copper and molybdenum concentrates. On the other hand, Freeport-McMoRan Inc. (FCX) engages in mining mineral properties in North America, South America, and Indonesia. The company primarily explores copper, gold, molybdenum, silver, other metals, and oil and gas.

Despite concerns over Chinese copper consumption in the short term due to real estate troubles and power shortages, copper demand is expected to remain high owing to growth in infrastructure investment in the United States and global initiatives to address climate change. The $1 trillion infrastructure bill passed on November 15 is expected to boost the demand for copper and other industrial metal products. Therefore, both SCCO and FCX should benefit.

FCX has gained 7.8% over the past month, while SCCO has a negative return. Also, FCX’s 43.1% gain year-to-date is significantly higher than SCCO’s negative return. Moreover, FCX is the clear winner with a 58.2% gain versus SCCO’s negative return in the past year.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 26, 2021, Mr. German Larrea, SCCO’s Chairman of the Board, said, “I am glad to report that 91.4% of our labor force was vaccinated as of October 10, 2021. This has allowed us to resume our activities and capture opportunities for efficiencies as we emerge from a highly challenging context. In tandem, we are recovering normal operating levels at all of our mines as we bring capital investment execution levels up to speed.”

On October 21, 2021, Richard C. Adkerson, FCX’s Chairman, and CEO, said, “Our balance sheet is strong, and we are prepared to make value-enhancing investments in our business while providing shareholders with increasing cash returns consistent with our established financial policy. The outlook for the copper market is extraordinarily positive. As a leader in the global copper industry, Freeport is well-positioned for success in generating value for all stakeholders."

Recent Financial Results

SCCO’s sales increased 18% year-over-year to $2.68 billion for the fiscal third quarter that ended September 30, 2021. The company’s operating income grew 59.7% year-over-year to $1.51 billion, while its net income came in at $867.60 million representing a 71.5% year-over-year increase. Also, its EPS came in at $1.12, up 72.3% year-over-year.

FCX’s revenues increased 58% year-over-year to $6.08 billion for the fiscal third quarter that ended September 30, 2021. The company’s operating income grew 179.8% year-over-year to $2.46 billion, while its net income came in at $1.40 billion representing a 325.2% year-over-year increase. Also, its EPS came in at $0.94, up 327.3% year-over-year.

Past and Expected Financial Performance

SCCO’s revenue and EPS grew at CAGRs of 12.9% and 48.5%, respectively, over the past three years. Analysts expect SCCO’s revenue to increase 9.6% for the quarter ending December 31, 2021, and 34.3% in fiscal 2021. The company’s EPS is expected to grow 39.9% for the quarter ending December 31, 2021, and 117% in fiscal 2021. Moreover, its EPS is expected to grow at a rate of 21.3% per annum over the next five years.

On the other hand, FCX’s revenue and EPS grew at CAGRs of 2% and 6.8%, respectively, over the past three years. The company’s revenue is expected to increase 47.5% for the quarter ending December 31, 2021, and 62.3% in fiscal 2021. Its EPS is expected to grow 119.5% for the quarter ending December 31, 2021, and 463.3% in fiscal 2021. FCX’s EPS is expected to grow at a rate of 28.9% per annum over the next five years.

Profitability

FCX’s trailing-12-month revenue is 2.02 times what SCCO generates. However, SCCO is more profitable with a gross profit margin and net income margin of 64.02% and 30.15% compared to FCX’s 46.00% and 18.45%, respectively.

Furthermore, SCCO’s ROE, ROA, and ROTC of 41.61%, 20.48%, and 23.27% are higher than FCX’s 24.27%, 10.60%, and 15.60%, respectively.

Valuation

In terms of forward non-GAAP PEG, SCCO is currently trading at 0.81x, 326.3% higher than FCX’s 0.19x. Moreover, SCCO’s forward EV/S ratio of 4.56x is 60% higher than FCX’s 2.85x.

So, FCX is relatively affordable here.

POWR Ratings

SCCO has an overall grade of B, which equates to a Buy rating in our proprietary POWR Ratings system. On the other hand, FCX has an overall grade of C, which translates to a Neutral rating. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SCCO has a grade of A for Quality. This is justified given SCCO's 64.02% trailing-12-month gross profit margin, 110.7% higher than the industry average of 30.39%. On the other hand, FCX has a Quality grade of B.

Of the 35 stocks in the Industrial - Metals industry, SCCO is ranked #10, while FCX is ranked #17.

Beyond what I’ve stated above, we have also rated the stocks for Stability and Sentiment. Click here to view all of SCCO ratings. Also, get all of FCX ratings here.

The Winner

With rising demand from major end-markets such as automotive and construction, both SCCO and FCX are expected to gain. However, it is better to bet on SCCO now because of its higher profitability and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Industrial - Metals industry here.

FCX shares were trading at $37.08 per share on Tuesday afternoon, down $0.90 (-2.37%). Year-to-date, FCX has gained 43.42%, versus a 23.04% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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