Every quarter, the investing public gets a momentary glimpse into the portfolios of the richest, most successful investors in the world. Known as 13-F filings, these reports that detail specific investments are required by the SEC of investment managers and high-net-worth individuals every three months. One individual's 13-F filing that gets regular attention, alongside those of Warren Buffett and George Soros, is none other than Carl Icahn. Having made his first fortune as a leveraged buyout artist in the 1980s, Icahn has moved on to become a long-term investor in public companies. And as you have no doubt guessed, it pays to know what he has been buying and selling.
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In fact, within his latest 13-F was a particularly interesting play for venturesome investors looking for a bargain: Freeport-McMoran (NYSE: FCX).
Image Source: Getty Images.
Recent history: down but not out
First, the bad news before the good. The worldwide commodities slowdown of the last few years has taken a toll on Freeport. That was only to be expected, as the company is not only engaged in the business of exploring for and extracting metals like copper and gold, but oil and natural gas as well. Its book value sank from $20 per share in 2013 to $4.19 as of Dec. 31, 2016, thanks to asset sales, losses, and writedowns. And these difficulties have only begun to abate. Last year's $4.1 billion dollar loss was practically a relief after 2015, when Freeport-McMoran sank into the red to the tune of $12.24 billion. True, this figure included $13.48 billion in asset write-offs, but that hardly made the loss any easier to swallow.
Fortunately, the bad news stops there. As any experienced commodity investor knows, asset write downs and losses can just as quickly turn around should the prices of the underlying commodities rebound. In fact, in 2016's fourth quarter, FCX reported a profit of $292 million, and free cash flow (FCF) of $631 million thanks to cost cuts and operational efficiencies. Not bad.
And, as we shall soon see, Freeport has a history of digging in and doing right by shareholders when the going gets tough.
Freeport-McMoran can trace its roots all the way back to the Texas Freeport Sulfur company, which was founded in Texas in 1912. From there, its corporate history is a long, winding road of asset purchases, dispositions, and even the loss of someCuban nickel-cobalt mining assets in the 1960s whenFidel Castro took over the government and nationalized all corporate interests in the name of the people.
The takeaway from its history, if anything, should be that dynamism is at the heart of it corporate philosophy. For this reason, then, we should not take the recent asset sales as signs of desperation -- this is how the company has operated since its beginnings.
Before the commodities downturn, the company was more than reaping the benefits of its world-class assets and its decades of experience as a commodities producer:
Source: S&P Global Market Intelligence.
Anyone who has been around the block a few times in the commodities market knows that it's often feast or famine. It is also highly likely that the folks at Freeport HQ are regretting much of the capital they spent on operations in more recent years (particularly 2014) -- buthindsight is always 20/20. The present situation is one of making lemons out of lemonade, and -- for investors -- properly assessing the potential earning power of Freeport-McMoran today. Here, the tale is a positive one.
How much do you trust GAAP?
To say that there have been wild swings in the carrying values of Freeport's assets in recent years would be to drastically understate the situation. As noted previously, book value per share peaked in 2013 at $20.17 per share, and touched $4.19 per share as of the end of last year. What's going on here?
FCX is a commodities producer, specializing in copper, gold, and, in recent years, oil and natural gas. One of the oddities of accounting requires commodity producers to not only prove that they truly have reserves in the ground, but that said reserves are economic. As the price of a particular commodity drops, so too, do reserves if they are unprofitable.
This, plus the sale of billions of dollars in assets by FCX's management, more or less explains those wild swings.
For investors considering the company today, though, it all comes down to one question: What can be expected of the company in the future? Well, as we've seen, commodity prices have only begun to normalize (to say nothing of any potential future gains), yet Freeport still managed to generate a profit of just under $300 million and free cash flow from operations of over $600 million all in Q4 2016. Looking ahead, the situation appears all the brighter. Based on management's projections and recent results, analysts expect the next few years to be rosy for Freeport:
Source: S&P Global Market Intelligence.
A few bearish words of caution
None of this is to say that Freeport-McMoran won't have its share of travails to work through in the years ahead. Should the global economy take a dive, or if commodity prices decline again simply due to oversupply concerns, shareholders in FCX will almost certainly suffer.
Also, though Freeport's balance sheet is likely manageable, it's nevertheless troubling. Assets as of Dec. 31, 2016 totaled $37.3 billion, while total liabilities came in at a whopping $28 billion. This nets us a shareholders equity of just over $9 billion -- number that has been subject to wild swings for aforementioned reasons. That's probably enough to keep the company's creditors at bay. However, make no mistake, the situation is less than ideal.
Also, it should be noted that while Mr. Icahn owned 91.2 million shares of Freeport as of 12/31/2016, this is down slightly from his Q3 13-F filing, which showed a stake of 104 million shares. This slight decrease could be due to any number of reasons, multi-billionaires play by a different set of rules than the average investor, and the sale could just as likely been made for tax reasons related to another position as a bearish opinion of FCX's future. Bottom line: At last count, Mr. Icahn had some $1.2 billion invested in the company -- no small sum no matter how you slice it.
Foolish final thoughts
When a professional investor such as Carl Icahn, worth some $16 billion at last count, steps up to the plate and buys a stake in any stock it's worthwhile to take notice. Freeport McMoran has made some mistakes, but is currently adapting to the world as it is with an eye toward the future -- a future where its world-class assets will more than likely produce plenty of profits for FCX shareholders. At it's current quotation of $13, shares in Freeport-McMoran are very arguably quite cheap, not only because Mr. Icahn is investing in them, but because of its ability to generate profits in today's less-than-ideal environment and likely future earning power. Not at least entertaining the idea of picking up a few shares would be downright (lower-case) foolish.
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