Southern Copper: P/E Concerns, Shares Near Key Support After Strong Q2 (NYSE:SCCO)

There are compelling reasons to favor a long position in copper. The AI ​​boom and the push toward electric vehicles will require significant investment in infrastructure around the world and other capital projects promoted by the US government, including reducing inflation. Act and the CHIPS and Science Act, are tailwinds.

But the elephant in the room is China. As long as the world’s second largest economy remains contested, it will likely be difficult for the industrial metal to perform well. Just this past weekend, Goldman Sachs cut its 2024 China GDP forecasts, citing weak measures of activity and weaker-than-expected employment and retail sales data.

I have a hold rating on Southern Copper Corporation (NYSE:SCCO). I think the $78 billion materials sector copper industry company is priced somewhat rich on a valuation basis when considering its earnings growth in years before. However, its technical situation is actually attractive and I will break down the key price levels on the chart to monitor at the end of the analysis.

Goldman cuts China GDP forecast for 2024

SCCO is a global copper producer and touches many points of upstream and downstream activities. It also engages in the mining of iron ore, molybdenum and even precious metals to a lesser extent. The Arizona-based firm reported a solid second-quarter report in July. Quarterly non-GAAP EPS of $1.21 beat the Wall Street consensus forecast of $1.06, while revenue of $3.1 billion, a very strong 36% increase from year-ago levels, were a significant battery of $278 million.

Net income rose 74% from Q2 2023 to $950 million, and its margin expanded from 23.8% to 30.5%. Of course, the first half of this year featured very high copper prices, and we’ve seen the metal drop significantly over the past few months. But SCCO proved timely with a 6.6% sequential rise in quarterly copper production, taking advantage of temporarily high prices. Its zinc and molybdenum production numbers were also robust.

Shares traded slightly higher in the session following the second-quarter report. Investors may have felt uneasy with the raised capital of $332 million, but Southern Copper’s management team announced a dividend of $0.60 along with a small dividend per share. Operationally, they detailed the resumption of operations at its Tia Maria project on the earnings call.

Ahead of next month’s earnings, the options market saw a significant 6.2% swing in earnings-related share prices when looking at the out-of-the-money that expires soonest after the release, according to data from Options Research & Technology Services (ORATS). ). Alpha Data Search shows a consensus of $1.11 operating EPS on revenue of $2.94 billion.

Key risks include a weaker global economywhich would put pressure on copper demand and prices. Higher labor costs would be another headwind, along with an increase in borrowing costs. Geopolitical conflicts and regulatory concerns are ongoing risks for this capital- and labor-intensive multinational firm.

On earnings perspective2024 is indeed seen as an abnormal year big growth. EPS is projected to grow next year but remain below $5 through 2026. This gives us as investors a good idea of ​​what normalized EPS is. Additionally, annual revenue is expected to approach $12 billion in 2024 and only grow incrementally from there. With a low free cash flow yield during what has been a bullish copper market, I would like to see improved cash flow metrics.

Southern Copper: Revenue, Earnings, Review Trends

At the evaluationif we assume normalized EPS of $4.60 and apply the stock’s five-year average price-to-earnings multiple of 21.3, then the stock should be trading near $98 — right where it closed last week. Still, I see downside risk to the P/E given that the earnings growth story simply isn’t as strong or sustainable as the broader S&P 500’s.

Giving SCCO the same earnings multiple as SPX seems slightly aggressive, so I see downside risks to the valuation. Shares are trading expensive and on a price-to-sales basis.

SCCO: Warm Valuation Measures, High P/S

Compared to its peersSCCO has a weak valuation rating, while its growth trajectory is tepid at best. But profitability metrics they’re healthy (although after a boom year, that’s to be expected).

Stock price timing it is rated B, but both absolute and relative price action have been weak since May, when copper peaked around $5 a pound and $10,000 a tonne. EPS revisions they were bullish, however, given 7 solid upgrades in the last 90 days, compared to just one downgrade.

Analysis of the competition

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q3 2024 earnings date of Tuesday, October 22 AMC. No other catalysts for volatility are seen on the calendar.

Risk calendar of corporate events

Technical takeover

While I am concerned about the valuation amid global macro risks, SCCO’s technical chart offers an opportunity for investors. Notice in the chart below that the stock has approached key long-term support at the mid-to-high $80s. After peaking at just $130 in the second quarter at the height of copper’s rally, the stock has fallen more than 30% to $90. The $80 high is a confluence of key support. First, a polarity zone comes into play from the peak range of August 2023 to the following January. Then, a support line for the uptrend enters the scene at the same place.

Also, take a look at the long-term 200-day moving average – the stock is trying to hold that indicator line, but the bears are showing some strength, preventing the SCCO from rising strongly above the 200 dma. There is also a bearish resistance line near the $100 mark. Additionally, the RSI momentum oscillator at the top of the chart confirms the lower price move. I would like to see SCCO either drop to $87 to buy on a pullback or go to the $108 high from a month ago.

Overall, SCCO is near critical support, offering a chance to buy the long-term uptrend chart amid a correction.

SCCO: Shares Approaching Key Support

conclusion

I have a hold rating on SCCO. I see the valuation as fair at best, while the technicals are encouraging after a significant pullback from the May 2024 all-time high.