Better Buy: Freeport-McMoRan vs. Caterpillar

The Better Buy: Freeport-McMoRan Vs. Caterpillar

The two companies are known for having cyclical earnings and two stocks that both had excellent years and beat the S&P 500. But between copper miner Freeport-McMoRan (NYSE: FCX ) and heavy equipment company Caterpillar (NYSE: CAT ), which one is better to buy now? Let's take a closer look.

The equipment company is probably harder to understand, so I'll start with it and its recent tumultuous second quarter earnings. Profit beat analysts' expectations and management's outlook for the full year was impressive. For example, adjusted operating profit is expected to be at the upper end of management's target range, and more importantly, its machinery, energy and transportation free cash flows (FCF) are expected to be around the top of the $4 target range. billion to 8 billion dollars.

In case you were wondering, management's $4 billion to $8 billion range reflects the cyclical nature of its business and is supposed to frame the lowest and highest FCF performance over the cycle. I'll come back to this point in a moment, but let's focus on where Caterpillar excels and what we can expect in the future.

Caterpillar sales trends

The following chart shows Caterpillar's retail sales growth. The company makes most of its sales through independent retailers, so its retail sales figures reflect its end-market demand. Indeed, retail sales figures mirrored those of Caterpillar in the period, with a broad base of strong sales in the raw materials (mining and aggregates) revenue sectors (up 20%), leading to a $385 million increase in segment profit. Energy and Transportation had an excellent quarter with a 27% increase in sales, leading to a $610 million increase in profit, and finally a 19% increase in construction sales, which led to an increase in profit of $814 million.

 While Caterpillar's growth in retail sales and profits is impressive, it's important to note a few things Caterpillar's mining and energy-related revenues are ultimately tied to the direction of commodity prices. Examining retail sales data for the construction industry in the quarter, only North American retail sales rose year-over-year, reflecting a boom in non-residential construction in the quarter. OUR.

So if you're looking to buy Caterpillar stock, you should be confident in the commodity's long-term outlook, as it's unlikely that North American non-residential construction spending will continue to grow at the sharp pace it's set to this year.

In terms of valuation, if you take the $4-8B FCF range and take the $6B midpoint, the cycle average, and put a 20x FCF multiple on the stock, the target market cap will be $120B. Caterpillar shares currently command a 23% premium to that value.

Freeport-McMoRan stock case

An investment in a copper miner also shows faith in the commodity and management's ability to continue producing it. As mentioned earlier, the argument for rising copper prices is not only based on the electrification of everything trend - the increasing use of copper in electric vehicles, renewable energy, smart buildings/infrastructure, etc. difficulties in obtaining mining permits and in some countries dealing with political instability.

Freeport-McMoRan is relatively well positioned here, with most of its copper coming from the US and Indonesia. In addition, Freeport-McMoran is working on a leaching technology that management believes could lead to 800 million pounds of copper annually recovered from the stockpile—a figure equivalent to about 20% of expected copper sales of 4 billion pounds in 2023.

Based on a copper price of $4 per pound (Freeport-McMoRan realized a price of $4.11 in the first quarter and $3.84 in the second quarter), management expects earnings before interest, taxes, depreciation and amortization (EBITDA) of $11 billion in 2024 to 2025—a figure that would bring Freeport-McMoRan to an enterprise value-to-EBITDA multiple of less than 6 times over that period.

All things considered, Freeport-McMoRan is looking better now. It's true that Freeport-McMoRan has more potential for commodity prices (including copper) to collapse. On the other hand, it will have more upside if the price of its key commodity continues to rise.

However, in a base case scenario where commodity prices stay (roughly) the same, Freeport-McMoRan will still look like a good value. Caterpillar is a good value based on current generation FCF. Still, there's no guarantee it will continue at this level, largely because of its reliance on North American construction spending.

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 When it comes to investing in the industrial sector, two major players often catch the attention of investors: Freeport-McMoRan and Caterpillar. Both companies operate in different areas of the industry, making them an interesting choice for those looking to diversify their portfolios. In this article, we will make a thorough comparison of these two giants to help you make an informed investment decision.

Freeport-McMoRan - Resource Focus:

Freeport-McMoRan is a leading global mining company known for its significant presence in copper, gold and molybdenum production. As the demand for these basic resources continues to grow due to industrialization and technological advancement, Freeport-McMoRan occupies a key position. The company's robust portfolio and extensive mining operations make it a key player in the commodity market.Freeport-McMoRan, mining company, copper production, gold mining, molybdenum, commodity market.

Caterpillar - Heavy Machinery Expert:

Caterpillar, on the other hand, is renowned for its prowess in manufacturing heavy machinery and equipment used in construction, mining and various other industries. With a long history of providing reliable and innovative machinery, Caterpillar has established itself as a popular choice for businesses that require durable and efficient equipment to get the job done. Caterpillar, heavy machinery, construction machinery, mining machinery, industrial equipment.

Financial performance and stability:

One of the key aspects to consider when comparing these companies is their financial performance and stability. Both Freeport-McMoRan and Caterpillar have shown resilience, but their revenue streams and market dynamics differ. Freeport-McMoRan's profits are affected by commodity prices, which can be volatile, while Caterpillar's revenue stream is more tied to global construction and infrastructure development. financial performance, revenue sources, market dynamics, commodity prices, infrastructure construction and development.

Growth prospects:

Understanding the growth prospects of these companies is vital for investors. Freeport-McMoRan's growth potential depends on global demand for metals, particularly with emerging markets. Caterpillar's growth depends on global construction and development projects, as well as growing demand for powerful machines in various industries. growth prospects, global demand, emerging markets, construction and development projects, machinery demand.

Risk assessment:

Investors must assess the risks associated with each company. Freeport-McMoRan faces risks related to fluctuations in commodity prices and geopolitical factors affecting mining operations. Caterpillar's risks include an economic downturn affecting construction projects and competition in the heavy engineering industry. Risk assessment, commodity price fluctuations, geopolitical factors, economic downturn, competition in the heavy engineering industry.

Both Freeport-McMoRan and Caterpillar are major players in their respective industries with unique advantages and challenges. Your investment decision should be consistent with your risk tolerance, portfolio diversification goals, and your outlook on the global commodity or construction market. Do your thorough research, consider the factors mentioned in this article, and consult with financial professionals to choose the best option for your investment portfolio. investment decision, risk tolerance, portfolio diversification, commodity market, construction industry.