Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Southern Copper Corp (NYSE:SCCO) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.
What we’re looking for
The graphs you’re about to see tell SoCo’s story, and we’ll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let’s take a look at SoCo’s key statistics:
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Revenue growth > 30% | 49.7% | Pass |
| Improving profit margin | (2.9%) | Fail |
| Free cash flow growth > Net income growth | (33.8%) vs. 46.6% | Fail |
| Improving EPS | 49.1% | Pass |
| Stock growth (+ 15%) < EPS growth | 17.7% vs. 49.1% | Pass |
Source: YCharts. * Period begins at end of Q1 2010.
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Improving return on equity | 4.6% | Pass |
| Declining debt to equity | 153.4% | Fail |
| Dividend growth > 25% | (55.1%) | Fail |
| Free cash flow payout ratio < 50% | 464% | Fail |
Source: YCharts. * Period begins at end of Q1 2010.
How we got here and where we’re going
SoCo doesn’t quite come through with flying colors, as it’s only mustered four out of nine possible passing grades. A big source of that weakness is the company’s falling free cash flow, which has diverged markedly from its net income over the past three years, and which may not be able to support its current dividend payouts if the trend continues. Will SoCo be able to turn this weakness around and rebound, or is the copper miner going to be tarnished for some time to come? Let’s dig a little deeper.
