Key Insights

The projected fair value for Freeport-McMoRan is US$55.05 based on 2 Stage Free Cash Flow to Equity Freeport-McMoRan's US$49.61 share price indicates it is trading at similar levels as its fair value estimate Analyst price target for FCX is US$50.38 which is 8.5% below our fair value estimate

How far off is Freeport-McMoRan Inc. (NYSE:FCX) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Freeport-McMoRan

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. 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 companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Levered FCF ($, Millions)  US$2.53b US$4.39b US$5.17b US$4.47b US$5.01b US$5.12b US$5.25b US$5.37b US$5.49b US$5.62b Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x4 Analyst x1 Analyst x1 Est @ 2.39% Est @ 2.36% Est @ 2.34% Est @ 2.32% Est @ 2.31% Present Value ($, Millions) Discounted @ 7.9%  US$2.3k US$3.8k US$4.1k US$3.3k US$3.4k US$3.2k US$3.1k US$2.9k US$2.8k US$2.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$32b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.



Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$5.6b× (1 + 2.3%) ÷ (7.9%– 2.3%) = US$102b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$102b÷ ( 1 + 7.9%)10= US$47b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$79b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$49.6, the company appears about fair value at a 9.9% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. dcf

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at 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 accounts for debt. In this calculation we've used 7.9%, which is based on a levered beta of 1.227. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Freeport-McMoRan

Strength

Debt is not viewed as a risk.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.

Opportunity

Annual earnings are forecast to grow faster than the American market.

Current share price is below our estimate of fair value.

Threat

Dividends are not covered by cash flow.

Annual revenue is forecast to grow slower than the American market.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Freeport-McMoRan, we've compiled three pertinent aspects you should assess:

Risks: For example, we've discovered 1 warning sign for Freeport-McMoRan that you should be aware of before investing here. Future Earnings: How does FCX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.