A steep decline was witnessed in the share price of Southern Copper Corp (NYSE:SCCO) after multiple analysts downgraded the company’s stock. The downgrades were made due to the weak expectations regarding the prospective financial performance of the company. Southern Copper Corporation was downgraded from Hold to Underweight by BB&T. The reasons cited by the analysts for the downgrade were the likelihood of reduced dividend payments, the overvaluation of the stock, increased cash outflows, and possible labor strikes. The payout ratio of the company was 79% for 2012, and most analysts consider this payout ratio to be unnaturally high. There is a reasonable level of certainty that the company will cut down its dividend payout ratio for the current financial period. Since all of these factors may have a major impact on the prospective market and financial performance of the company, investors and analysts are losing their confidence in Southern’s stock. Along with BB&T, the company’s shares were also downgraded by Citigroup and JPMorgan with a price target of $41.50.
The share price of Southern Copper recently reached its 52 week high at $42.03, with a 52 week low of $27.72. One of the reasons behind the recent downgrades is the significant incline in the share price, which is being interpreted as overvaluation. The rationalization behind this interpretation is that there is sufficient information evidencing the fact that the prospective financial performance of the company will decline when compared to prior periods, and the rise in share price does not correlate with the company’s profitability. The share price rebounded immediately after it hit its 52 week high. Currently, the shares are being traded within the range of $39.28 and $39.60. The following chart represents the trend of the share price over the past year.
It can be observed from the chart that the share price followed a fairly positive trend after reaching its year’s lowest point in May 2012. It can also be observed that after hitting its 52 week high, the share price is following a downward trend and this trend is expected to continue in the foreseeable future.
Competitive Environment Around SCC
The decline in the financial performance is not confined to Southern Copper Corp (NYSE:SCCO) in the copper mining industry. All the other companies involved in copper production are going through a difficult time due to increasing uncertainty regarding prospective copper demand on a global scale.
One of the company’s competitors that is taking active steps to mitigate its business risk is Freeport-McMoRan Copper & Gold Inc (NYSE:FCX). Freeport has decided to minimize its risk by reducing its dependence on the copper business and by undertaking other businesses. In an attempt to pursue the diversification, the company has recently acquired two oil and gas exploration companies, i.e. McMoRran Exploration and Plains Exploration and Production. The reason cited by Freeport for moving away from the copper business is the slow global demand and deferred profit generation from new projects.
BHP Billiton Limited (NYSE:BHP) is another company that operates in the copper industry. BHP was required to part ways with a $20 billion copper production project due to the weak prospects. The reason why BHP is not influenced by declining profitability of copper business is that it is very well diversified. There are other business segments related to natural resources that are being managed by the company, therefore BHP’s business risk is already minimized. Thus, it can be said that the decline is being witnessed throughout the copper industry; and if Southern Copper is to enhance its financial performance, an increased business diversification will be one way to pursue it.
Bottom Line
After the analysis of multiple factors influencing the market performance of Southern Copper Corporation, in my opinion, investors should sell the shares of the company. The rationalization behind this recommendation is that the shares are currently being traded near to their 52 week high and the share price is expected to decline in the foreseeable future. Therefore, at this point, it may be a favorable decision for investors to sell their shares. This decision is also valid for long term investors as the dividend payout is expected to decline in the upcoming financial periods.
The article Southern Copper Slides After Ratings Downgrade originally appeared on Fool.com and is written by Muhammad Bazil.
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