Is Southern Copper heading north or south from $34.74?

It is time to take another look at Southern Copper.  Its stock price has declined from its most recent peak of $48.96 at the beginning of 2011 down to $34.74 today.  That is a decline of about 29%.  Has this copper producer entered value territory yet?  I’m going to perform my quick valuation checks to see what is going on with this mega-copper producer.

Shares outstanding: 850 million (slight buyback or the past five years)

Dividend record

Dividend yield: 6.4% projected

Quarterly dividend: $0.56 ($2.24 annual rate)  This is a two cent cut from the previous quarter.

Dividend payout ratio: 116% of 5 yr. avg. earnings per share (this means that another dividend cut is possible unless earnings improve enough to bring the dividend payout ratio down to 80%.  Earnings would have to improve to $2.80 per share at the current quarterly dividend rate).

Earning power

Last 5 years earnings adjusted for slight changes in capitalization

            EPS     Net inc.           Adj. EPS

2006    $2.31   $2,038 M         $2.40

2007    $2.51   $2,216 M         $2.60

2008    $1.60   $1,407 M         $1.66

2009    $1.09   $929 M            $1.09

2010    $1.83   $1,554 M         $1.83

5 year average earnings per share: $1.92 @ 850 M shares.  SCCO is trading at 18.1 times its 5 year average earnings.  I like value stocks below 12 times earnings.  Above 20 is speculative.

Balance sheet

Book value: $4.58

Price to book value: 7.58 (bad)

Current ratio: 3.25 (over 2 is good; no short term liquidity problems)

Quick ratio: 2.65 (over 1 is good; no short term liquidity problems)

Technicals

The 3 year chart confirms the beating that SCCO has taken lately.  Its technicals show that there is room to fall further.  http://bit.ly/SCCO3yrChart

Conclusion

Wait for the double dip recession to buy Southern Cooper (SCCO) below $23.04.  It would be trading for 12 times its 5 year average earnings per share at that price.  The dividend will likely be cut again and it won’t be a high dividend stock with any sustainability until the market price and the dividend come down.  It traded near $23.00 as recently as May 2010. 

Demand for copper at today’s high prices of will wane once the global double dip recession become apparent to most investors.  Also, copper demand at today’s prices will also decrease when China’s construction bubble pops.

Disclosure: I don’t own SCCO or plan to own it above $23.04 per share.

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Published in: on May 24, 2011 at 4:51 pm  Leave a Comment  

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