Shortly after the deal, we noticed that billionaire Leon Cooperman’s Omega Advisors had bought shares in Mcmoran Exploration; we’d attributed that entirely to a merger arbitrage play. However, the hedge fund manager apparently thinks that the combined company is going to be a value opportunity as well. According to an interview on CNBC, Cooperman actually thought that the acquisition was a good thing for Freeport-McMoRan; as a result, the decline in the stock price since the announcement has made it even more attractive.
Omega has been buying the stock, after not reporting a position in its 13F filing for the third quarter of 2012 (see Cooperman’s stock picks). Billionaires George Soros and Israel Englander had thought it was a good time to buy Freeport-McMoRan Copper & Gold Inc., increasing their own stakes in the company between July and September (find more stock picks from George Soros and from Englander’s Millennium Management). Point State Capital, a hedge fund managed by Sean Cullinan and other former employees of billionaire Stanley Druckenmiller’s Duquesne Capital, was the largest holder of the stock in our database of 13F filings with a position of 2.9 million shares.
Does it make sense to join Cooperman in Freeport-McMoRan?
We’ve mentioned that Freeport-McMoRan Copper & Gold Inc. tends to be tied to the global economy; even though gold prices can increase in times of economic stress, copper is one of the most macro driven commodities and so the stock has a beta of 2.3. Revenue and earnings have been down, though with the fall in the stock price (shares are down 13% in the last year) Freeport-McMoRan trades at only 8 times forward earnings estimates. In comparison, Newmont Mining- another copper and gold miner- carries a forward P/E of 9, and large oil companies such as Exxon Mobil Corporation (NYSE:XOM) tend to have earnings multiples close to 10 as well. So while there is a value case for Freeport-McMoRan at these levels, there is not much of a discount compared to its peers, shareholders do have to worry about weaker management focus, and of course the forward earnings estimates come from Wall Street analysts and so may turn out to be too bullish. It’s possible that the market has sufficiently punished the stock for its purchase of the oil companies, which will represent a minority of the combined company’s capitalization in any case.
Since Freeport-McMoRan tends to trade in line with macro developments, investors might also take an interest in Caterpillar Inc. (NYSE:CAT), which does so as well. The correlation between the two stocks, at least until the Mcmoran/Plains deal, has been quite strong. Caterpillar’s forward P/E is 11, though growth expectations for the next several years generate a PEG ratio of 0.7. It’s possible that a portfolio consisting of, say, three parts Caterpillar and one part an oil major such as Exxon Mobil or BP would be a better buy than Freeport-McMoRan. This would be more expensive compared to earnings projections for 2013, but might be worth the small premium.
The stock may turn out to be undervalued if management can successfully integrate (or, in the case of Mcmoran Exploration, re-integrate) these acquisitions without much loss of focus. From a markets point of view, Freeport-McMoRan’s role as a macro play may be reduced with this diversification though if it can remain efficient Cooperman’s move will make sense. Still, we aren’t as confident that management is making a good decision and would advise against buying.
