“Mentorship Program” Recommendations
- Week Beginning -
Monday, December 17, 2018

by Ian Harvey

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Option Trade – Freeport-McMoRan Inc (NYSE: FCX) Calls

Wednesday, December 19, 2018

** OPTION TRADE: Buy FCX JAN 18 2019 11.000 CALL at approximately $0.50.

 Place a pre-determined sell at $1.00.

Also include a protective stop loss of $0.20.)

 So far, 2018 has been a year to forget for basic material stocks. The seemingly endless trade war and economic slowdown fears have combined to take 41% off of Mining name Freeport-McMoRan Inc (NYSE:FCX)’s share value. With the descent, FCX has given back much of the ground gained during its 2016-2017 recovery. However, the firm is still in a strong spot.

Yesterday's market rally breathed new life into the stock just as it was approaching a key support zone. It ended the day with a high-volume 6.5% gain. With a breakdown now avoided, we could be poised for a modest bounce.

Freeport-McMoRan is bringing new assets online, such as the Lone Star project, and has negotiated with the Indonesian government to prevent issues until 2041.

Freeport-McMoRan should have billions in cash flow in the mid-2020s. That cash flow should enable the company to heavily reward those who invest now.

As well, yesterday saw Indonesian miner PT Inalum say it expects to finalise this week a $3.85 billion deal to take majority control of the local subsidiary of mining giant Freeport McMoRan Inc, once environmental and other issues are resolved.

The long-anticipated deal will close "hopefully this week", Inalum CEO Budi Gunadi Sadikin said on Tuesday, adding that a conclusion within that timeframe was "highly likely".

At the same time, Inalum, which last month raised more than $4 billion in bonds to fund the deal, aims prove to investors it is a "world-class partner that can work with them and get a decent and sustainable business out of Indonesia's natural resources," Sadikin said.

As part of the transaction, Inalum has proposed to sell a 10 percent stake in PT Freeport Indonesia to Papua province and Mimika regency, where the giant Grasberg mine is situated, for $819 million, Sadikin said.

About Freeport-McMoRan ……

Freeport-McMoRan Inc engages in the mining of mineral properties in the United States, Indonesia, Peru, and Chile. The company primarily explores for copper, gold, molybdenum, silver, and other metals, as well as oil and gas. Its assets include the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, and Miami in Arizona; Tyrone and Chino in New Mexico; and Henderson and Climax in Colorado, North America, as well as Cerro Verde and El Abra mines in South America.

Freeport-McMoRan operates two of the ten largest copper mines based on reserves. The company also operates three of the ten largest mines based on copper production. That shows the strength of Freeport-McMoRan’s asset portfolio, the company is arguably the largest player in the copper markets. Copper is essential to the world. 

Influencing Factors…..

Given the importance of copper in electronics, cars, airplanes, and everything else, being a major copper company makes Freeport-McMoRan an essential company to the world. As copper demand grows, so too will copper prices, and Freeport-McMoRan is in an incredible position to take advantage of that. More so these assets mean long term cash flow for shareholders.

Looking at the spread of Freeport-McMoRan’s assets, the company has a global leadership position. The company has significant current production capacity with long term expansion options, which will enable the company to grow production as demand grows. The company’s assets are also heavily centered in the United States, a stable regulatory environment.

Freeport-McMoRan has ~4.5 billion pounds of copper equivalent capacity. Given the cost to develop green field capacity, the implied replacement value of Freeport-McMoRan’s current capacity is $36-45 billion. This shows the value of Freeport-McMoRan’s assets, more than double the company’s market cap.

On top of Freeport-McMoRan’s impressive asset portfolio, the company also have impressive growth potential. This impressive growth potential will allow the company’s earnings to grow.

Past Earnings.….

Freeport-McMoRan last announced its earnings results on Wednesday, October 24th. The natural resource company reported $0.35 EPS for the quarter, topping the consensus estimate of $0.33 by $0.02. The firm had revenue of $4.91 billion for the quarter, compared to the consensus estimate of $4.50 billion. Freeport-McMoRan had a net margin of 15.80% and a return on equity of 22.63%. The business’s quarterly revenue was up 13.9% on a year-over-year basis. During the same quarter last year, the firm posted $0.34 EPS.

Future Earnings…..

Equities research analysts expect Freeport-McMoRan to post earnings of $0.26 per share for the current fiscal quarter. Freeport-McMoRan reported earnings of $0.51 per share in the same quarter last year, which indicates a negative year over year growth rate of 49%. The firm is expected to announce its next earnings report on Thursday, January 24th.

Future Outlook…..

Freeport-McMoRan is bringing online new projects. By 2021, even with the recent drop in commodity prices, the company should have $3 billion in annual cash flow. That cash flow is expected to grow going forward, especially with an improvement in commodity prices. That investment would make Freeport-McMoRan a top tier choice today.

Analysts….

Several analysts have recently commented on the company…..

  • ValuEngine upgraded shares of Freeport-McMoRan from a “strong sell” rating to a “sell” rating in a report on Friday, September 21st.
  • Deutsche Bank set a $15.00 target price on shares of Freeport-McMoRan and gave the stock a “hold” rating in a report on Tuesday, October 2nd.
  • Barclays started coverage on shares of Freeport-McMoRan in a report on Wednesday, October 10th. They issued an “underweight” rating and a $12.00 target price on the stock.
  • Finally, B. Riley dropped their target price on shares of Freeport-McMoRan from $19.00 to $18.00 and set a “buy” rating on the stock in a report on Wednesday, September 19th.

Four analysts have rated the stock with a sell rating, eleven have issued a hold rating and six have assigned a buy rating to the stock. Freeport-McMoRan has an average rating of “Hold” and an average price target of $16.71.

Summary

Freeport-McMoRan’s impressive and distributed portfolio of assets, along with its growth potential, and financials, make Freeport-McMoRan a strong investment.

FCX has a market capitalization of $17.30 billion, a PE ratio of 10.21 and a beta of 2.45. Freeport-McMoRan has a 12 month low of $10.59 and a 12 month high of $20.25. The company has a debt-to-equity ratio of 0.83, a current ratio of 2.84 and a quick ratio of 1.78.


Option Trade – Western Digital Corp (NASDAQ: WDC) Puts

Tuesday, December 18, 2018

** OPTION TRADE: Buy WDC JAN 18 2019 37.500 PUT at approximately $2.00.

 Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.)

Hard drive and solid-state storage specialist Western Digital Corp (NASDAQ: WDC) has witnessed a significant price decline in the past recent weeks, and it has seen negative earnings estimate revisions for the current quarter and the current year.

The data storage veteran's stock is trading 55% below its 52-week highs, just 13% above its share price at the end of 2012.

For the full year, there have been eight estimates moving down in the past 60 days, compared with no upward revisions. This trend has caused the consensus estimate to trend lower, going from $11.71 a share two months ago to its current level of $7.30.

Also, for the current quarter, Western Digital has seen six downward estimate revisions versus no revision in the opposite direction, dragging the consensus estimate down to $1.59 a share from $3.19 cents over the past 60 days.   

Also, in the past 90 days there have been 18 downgrades for Western Digital; with the latest with BidaskClub lowering shares of Western Digital from a sell rating to a strong sell rating in a report published on Saturday, December 8th.

About Western Digital……

Western Digital Corporation develops, manufactures, and sells data storage devices and solutions worldwide. It offers client devices, including hard disk drives (HDDs) and solid state drives (SSDs) for computing devices, such as desktop and notebook PCs, security surveillance systems, gaming consoles, and set top boxes; flash-based embedded storage products for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as automotive, IoT, industrial, and connected home applications; flash-based memory wafers; and embedded storage solutions and iNAND embedded flash products, such as multi-chip package solutions.

Recent Movement…..

Share prices started to slide after the third-quarter report in April, even though the company beat Wall Street across the board and issued solid guidance for the next reporting period. In that earnings call, CEO Steven Milligan said that average selling prices for the company's storage products are "normalizing" after a long stretch of stable and sometimes even rising prices.

Taken together with similar statements from sector peers like memory chip specialist Micron Technology (NASDAQ:MU), analysts and investors were quick to conclude that Western Digital's days of coasting comfortably on a foundation of stable disk prices were ending, especially in the market for memory-based solid state drives (SSD).

The same worries resurfaced in the fourth- and first-quarter reports, driving Western Digital shares lower despite mixed-to-respectable results. End-user demand for data storage products is waning due to uncertainty about where the global economy is headed. Micron, Western Digital, and other hardware makers are responding by tapping the brakes on their production volumes until these issues have been worked out.

Influencing Factors…..

Even though the stock is trading at just 7.4 times trailing earnings and 6.3 times free cash flows, there's some lag built into these valuations as the drivers behind Western Digital's recent misfortunes could stick around for quite a while. Memory chip prices are generally expected to solidify again in 2019, but it's harder to predict how the international trade wars will develop. The stock may continue to drop for at least another couple of quarters and perhaps more, even if the long-term prognosis looks good.

Pricing concerns, which have weighed on the company’s performance in the recent past, are  expected to continue in the near term. The entire industry is seeing normalization of NAND pricing, and this will likely result in lower earnings for Western Digital in fiscal 2019. In fact, the forecast for the adjusted earnings is expected to decline in the high 30s percent for the full year.

Western Digital saw mid-teens decline in pricing in Q1 FY19, and it can dip even further in the coming quarters. Moreover, there are uncertainties with respect to the overall demand for flash storage, given the trade tensions with China, among other factors.

Past Earnings.….

Western Digital last released its quarterly earnings data on Thursday, October 25th. The data storage provider reported $2.78 earnings per share for the quarter, beating the Thomson Reuters’ consensus estimate of $2.70 by $0.08. Western Digital had a return on equity of 35.37% and a net margin of 2.46%. The business had revenue of $5.03 billion for the quarter, compared to analysts’ expectations of $5.14 billion. As a group, equities analysts forecast that Western Digital Corp will post 6.19 EPS for the current year.

Analysts….

Western Digital is now covered by analysts at Deutsche Bank AG. They set a "hold" rating on the stock on December 13.

 

Several analysts have recently commented on the company…..

  • 11/20/2018 – Western Digital had its “neutral” rating reaffirmed by analysts at Susquehanna Bancshares Inc. They now have a $44.00 price target on the stock, down previously from $120.00.
  • 11/20/2018 – Western Digital was downgraded by analysts at UBS Group AG from a “positive” rating to a “neutral” rating.
  • 11/17/2018 – Western Digital had its “strong sell” rating reaffirmed by analysts at Zacks Investment Research.

According to Zacks, “Western Digital reported disappointing first-quarter fiscal 2019 results. Both top and bottom line declined year over year. It also provided a tepid forthcoming guidance. The company intends to temporarily reduce flash output. Further, sluggishness in client compute hard drives and slower-than-expected trends in flash market pricing remains a headwind. Geopolitical tension in China, changes in monetary policy and foreign exchange fluctuations has also impacted the quarter’s results. Moreover, stiff competition from Seagate, Hitachi, Samsung and Intel in the storage coupled with pricing pressure adds to woes. Customer concentration also remains a headwind. Shares of the company have underperformed the industry over the past one year.”

Four equities research analysts have rated the stock with a sell rating, fifteen have assigned a hold rating and thirteen have assigned a buy rating to the company’s stock. Western Digital presently has an average rating of “Hold” and a consensus price target of $79.80.

Insider News….

Director Matthew E. Massengill sold 1,681 shares of the business’s stock in a transaction that occurred on Monday, November 5th. The stock was sold at an average price of $47.68, for a total value of $80,150.08.

Summary

Western Digital traded down $0.53 during midday trading on Monday, reaching $38.25. 6,326,314 shares of the company were exchanged, compared to its average volume of 4,572,995. Western Digital Corp has a one year low of $37.95 and a one year high of $106.96. The company has a current ratio of 2.41, a quick ratio of 1.70 and a debt-to-equity ratio of 0.96. The stock has a market cap of $11.22 billion, a P/E ratio of 2.83, a price-to-earnings-growth ratio of 0.33 and a beta of 1.15.