An intrinsic calculation for Freeport-McMoRan Inc. (NYSE:FCX) suggests that the company is undervalued by 43%

Key findings

• The projected fair value for Freeport-McMoRan is $87.34 based on 2-step free cash flow to equity
• The current share price of $49.56 suggests that Freeport-McMoRan may be undervalued by 43%
• The analyst price target for FCX is $55.21, 37% below our fair value estimate.

How far is Freeport-McMoRan Inc. (NYSE:FCX) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued. To do this, we take the company’s projected future cash flows and discount them to today’s value. This is done using the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. For those who enjoy stock analysis, the analysis model from Simply Wall St listed here might be of interest.

Check out our latest analysis for Freeport-McMoRan

Is Freeport-McMoRan fairly valued?

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. In the first stage, we need to estimate the company’s cash flows for the next ten years. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. So we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 43 billion US dollars

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.9%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = $9.4 billion × (1 + 2.4%) ÷ (7.9% – 2.4%) = $175 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 175 billion US dollars ÷ (1 + 7.9%)¹⁰= 82 billion US dollars

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is $125 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of $49.6, the company appears quite undervalued at a 43% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

The assumptions

We should point out that the key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not take into account the potential cyclicality of an industry or a company’s future capital needs, and therefore does not provide a complete picture of a company’s potential performance. Since we consider Freeport-McMoRan as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC), which takes debt into account. In this calculation, we used 7.9%, which is based on a leveraged beta of 1.193. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Freeport-McMoRan

Looking ahead:

While a company’s valuation is important, it is only one of many factors you need to evaluate for a company. The DCF model is not a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to be true for this stock to be under/overvalued.” If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome can be very different. Why is the intrinsic value higher than the current share price? For Freeport-McMoRan, there are three important aspects you should consider:

1. Risks: Note that Freeport-McMoRan shows 2 warning signals in our investment analysis you should know about…
2. Future income: How does FCX’s growth rate compare to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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