Stocks’ Details 

Freeport-McMoRan Inc.

Improvement in Volumes and Decline in Cash Costs: Freeport-McMoRan Inc. (NYSE: FCX) is a mining company based in Arizona. The company has reserves in copper, gold and molybdenum with operations in North America, South America and Indonesia. FCX reported a 6.6% increase in volume sales of copper in Q3 FY20 over last year. Gold and molybdenum showed a decline in unit volume over last year. The company maintained cash costs which resulted in an increase in average realization across metal categories. Its EBITDA margin surged to 34.0% in Q3 FY20 as compared to 9.1% in pcp. Ramping-up Grasberg underground contributed to an increase in copper and gold sales. Its Lone Star project is on track to produce 200 mm lbs of cu/ annum. It had sold-off Kisanfu undeveloped project recently for net proceeds of $415 million. The project has copper and cobalt resources and it was sold as it no longer a strategic fit to Freeport’s long-term strategy.

Financial Highlights (Source: Company Reports)

Outlook: The company has projected average price realization of copper at $3.00 per pounds, $1,900 per ounce of gold and $8.00 per pound for molybdenum in Q4 FY20. Operating cash flows are expected to reach $2.9 billion for the full-year 2020. As unit costs to decline further, its operating cash flows for FY21 are expected to be significantly higher than FY20 levels. Its capex associated with Grasberg site in Indonesia to hit $1.3 billion taking the total capex to be $2.0 billion for FY20.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Price/Cash Flow Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: FCX had a sizeable debt of around $10.0 billion as of Sep’20. The company, however, has reduced it over last year. It also sold-off non-core assets which may help to pair-down debt. It had liquidity of $5.9 billion including an undrawn line of $3.5 billion (and $2.4 billion of cash) as of Sep’20. FCX witnessed a 1-month and 3-month returns of 5.19% and 61.49%, respectively. The stock is trading close to its 52-week high of $25.43. On the technical analysis side, the stock has a resistance level of $25.00 and a support level of $23.73. We have valued the stock using the Price/Cash Flow multiple based illustrative relative valuation method and arrived at a target price, with a correction of low single-digit (in percentage terms). For this purpose, we have taken peers such as Newmont Corporation, (NYSE: NEM), Nexa Resources SA (NYSE: NEXA), and Barrick Gold Corp. (NYSE: GOLD). Considering the steep price movements over last three months, and current trading levels, we are of the view that most of the positive factors of the company have been factored in at current levels. Hence, we suggest an “Expensive” rating on the stock at the closing price of $24.74, up by 0.45% on December 29, 2020.

Leidos Holdings Inc.

Robust Order Backlog and Stable EBITDA Margin: Leidos Holdings Inc. (NYSE: LDOS) provides cybersecurity, information technology, and analytics services to defense, intelligence, homeland security, civil, and healthcare markets. Revenues surged by 14.4% in Q3 FY20 over pcp mainly driven by acquisitions of Dynetics, Inc. and L3Harris Technologies' security detection and automation businesses. It had backlogs of $31.7 billion as of Oct’20. During the quarter, LDOS received contract worth $445 million from U.S. national security and intelligence clients for mission critical services. It had received follow-on contract for $306 million from The Army Contracting Command to provide the full spectrum of turnkey ground and flight operations. Its Defense Solutions accounted for about 60% of total revenues in Q3 FY20. Its EBITDA margin of 10.7% in Q3FY20 broadly remained in-line with prior year driven by high margin contract wins offsetting an increase in costs and intangibles amortization costs. The company closed Q3 FY20 with a cash balance of $512 million and a debt of $4.5 billion.

Key Financials Q3 FY20 (Source: Company Reports) 

Outlook: LDOS has net bookings totalled $4.3 billion as of Oct’20. With this, management is expecting revenue to surge $12.3-$12.5 billion in FY20. Its adjusted EBITDA margin has been revised upwards from the initial estimate to 10.6%-10.8% in FY20. Its operating cash flows to reach over $1.2 billion.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Recently, Leidos Holdings entered into a definitive agreement to acquire 1901 Group to strengthen its capabilities in cloud and IT services. The company intended to bind its defense services with IT capabilities. The stock of the company delivered 1-month and 3-months returns of 1.28% and 14.37%, respectively. The stock is trading slightly higher than the average of its 52-week high and low of $125.84 and $68.0, respectively. On the technical analysis front, the stock has a resistance level of $105.86 and a support level of $102.30. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price, with an upside potential of low double-digit (in percentage terms). For this purpose, we have taken peers such as Northrop Grumman Corp. (NYSE: NOC), Perspecta Inc. (NYSE: PRSP), General Dynamics Corp. (NYSE: GD), to name a few. Considering the stable cash flows backed by government contracts, high ROE, recent acquisition, decent return in the past months and current trading level, we recommend a “Hold” rating to the stock at the closing price of $103.59, down by 1.14% on December 29, 2020.

First Solar, Inc.

Migration to Series 6 Manufacturing: First Solar, Inc. (NASDAQ: FSLR) is a manufacturer of solar panels and provider of utility-scale solar power projects. FSLR commenced production of 445 watt modules which delivers high energy efficiency. All of its factories achieved 100% utilization during the Q3 FY20, with international factories touched 118%-119%. Its solar module segment witnessed expansion in gross margin in Q3 FY20 (on QoQ basis). Manufacturing costs at its Series 6 facility fall 40% lower than Series 4 facility. FSLR continues to receive notable contracts and added net bookings of 1.6 GW since the preceding quarter. Year-to-date bookings stood at 4.1 GW. Its vertically integrated operations delivered a strong EBITDA margin of 28.7% in Q3 FY20, up from 16.9% reported in Q3 of last year. FSLR closed the Q3 FY20 with a cash balance of $1.67 billion, an increase of $29 million from the preceding quarter driven by strong traction in international sales and operating cash flows from its PV module business.

Key Financial Highlights Q3 FY20 (Source: Company Reports)

Outlook: The company has 6.7 GW solar contracts for deliveries in 2021 and 3.6 GW across 2022 and 2023. Its net sales are projected to reach $2.6-$2.9 billion in FY20. The company is expecting gross margin to be 25% in FY20. Its operating income is expected to be in the range of $310-$380 million. FSLR is expecting solar PV shipments to reach 5.5-5.7 GW by FY20. Its capital expenditure which includes migration to Series 6 manufacturing to increase $450-550 million in FY20.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The stock is rallying with 3-month and 6-month returns of 47.47% and 95.92%, respectively. It is trading close to its 52-week high of $109.09. On the technical analysis side, the stock has a resistance level of $105.56 and a support level of $79.48. The company began to streamline with vertically integrated operations, but its ROE of 2.9% is lower than industry median of 3.3% in Q3 FY20. The company spent a sizeable capex towards migrating to Series 6 facility. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price, with a limited upside (in percentage terms). For this purpose, we have taken peers such as SunPower Corp. (NASDAQ: SPWR), Canadian Solar Inc. (NASDAQ: CSIQ), JinkoSolar Holding Co Ltd. (NYSE: JKS), to name a few. Considering the steep price movements over the last six months, and current trading levels, we are of the view that most of the positive factors of the company have been factored in at current levels. Hence, we suggest an “Expensive” rating on the stock at the closing price of $96.98, down by 4.6% on December 29, 2020. We further suggest investors to wait for better entry levels.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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