Billionaire Carl Icahn Is Bullish on Freeport-McMoRan Inc; Here’s Why

Billionaire Carl IcahnThere is no other way to put it: Freeport-McMoRan Inc (NYSE:FCX) stock has been hit hard. Even the legendary billionaire Carl Icahn couldn’t do much about it.

The famous activist investor reportedly took home $2.0 billion of profits on Netflix, Inc. (NASDAQ:NFLX) last year. So what’s going on with his bet on Freeport stock?

Freeport Stock: Will Carl Icahn Turn Things Around?

First off, given the nature of Freeport’s business, it’s not that hard to see why FCX stock has been in the doldrums.

Freeport is one of the world’s largest producers of copper and gold. And in case you haven’t noticed, these days, mining isn’t exactly the winning business it once was. Although precious metals have bounced back after entering 2016, their prices are still nowhere near where they were a few years ago.

Today, gold is trading at $1,272 an ounce, nearly 30% lower compared to its high in 2012. Copper is down even more. At $2.22 per pound, the copper price has plunged nearly 40% in the past three years.

With metals prices being where they are today, mining gold and copper might not be that profitable. But does Freeport have other operations? Well, as it turns out, the company also has interests in oil and gas. Ouch!

So, mining plus oil and gas—not exactly a winning combo. But that did not prevent Carl Icahn from scooping up 88 million shares in Freeport. His 8.5% stake in FCX stock also made him the company’s largest shareholder. (Source: The Securities and Exchange Commission, August 17, 2015.)

Icahn, in his activist investor style, criticized the company’s spending, capital structure, and executive compensation. Not long after Icahn’s arrival, Freeport announced that the company’s chairman and co-founder James Moffett would be stepping down. (Source: “Freeport-McMoRan Elects Gerald J. Ford Non-Executive Chairman and Names James R. Moffett Chairman Emeritus,” Freeport-McMoRan Inc, December 28, 2015; http://investors.fcx.com/investor-center/news-releases/news-release-details/2015/Freeport-McMoRan-Elects-Gerald-J-Ford-Non-Executive-Chairman-and-Names-James-R-Moffett-Chairman-Emeritus/default.aspx.)

And that’s just the start. Freeport said that it would reduce capital spending by 29% in 2016 and also cut 10% of its U.S. workforce—that’s 1,500 jobs. The company even suspended its annual dividend of $0.20 per share. (Source: “Freeport-McMoRan Announces Further Reduction in Capital Spending, Metals Production and Suspension of Common Stock Dividend,” Freeport-McMoRan Inc, December 9, 2015; http://investors.fcx.com/investor-center/news-releases/news-release-details/2015/Freeport-McMoRan-Announces-Further-Reduction-in-Capital-Spending-Metals-Production–Suspension-of-Common-Stock-Dividend/default.aspx.)

Normally, cutting dividends is not considered a good move. But Carl Icahn seemed to be more than okay with it. He said that he “absolutely agree[s] with it” because “you have to conserve capital at these companies.” (Source: “Carl Icahn: I Agree with Freeport Dividend Cut,” CNBC, December 11, 2015; http://www.cnbc.com/2015/12/11/carl-icahn-i-agree-with-freeport-dividend-cut.html.)

The Bottom Line on FCX Stock

Finally, let’s not forget how Freeport-McMoRan absolutely smashed earnings estimates in the most recent quarter. In the fourth quarter of 2015, the company reported an adjusted net loss of $0.02 per share, a much better number compared to analysts’ expectations of a $0.17 loss per share. (Source: “Freeport-McMoRan Reports Fourth Quarter and Year Ended December 31, 2015 Results,” Freeport-McMoRan Inc, January 26, 2016.)

Going forward, the company’s huge pile of debt could continue to be an overhang for FCX stock. However, with Icahn’s involvement and maybe even a split of the company into two, we might see a lot of action in Freeport stock.

Photo credit: Flickr; Image copyright 2016, tua alamac

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