Southern Copper: Analyzing P/E Concerns and Support Levels Post Q2 Earnings (NYSE:SCCO)
There are several factors driving interest in the copper market, including the increasing demand for copper due to the AI boom and the transition towards electric vehicles. These trends are expected to bring about significant infrastructure investments globally. Additionally, initiatives such as the Inflation Reduction Act and the CHIPS and Science Act in the US are providing further support to the copper industry. However, the ongoing challenges faced by China, the world’s second-largest economy, could hinder the performance of industrial metals like copper. Recent reports from Goldman Sachs lowering their 2024 China GDP forecast due to weak economic indicators serve as a reminder of this risk.
Southern Copper Corporation (NYSE:SCCO) is a key player in the copper industry with a market capitalization of $78 billion. While the company operates within the materials sector, it is currently trading at a valuation that may be considered rich when compared to its projected earnings growth in the upcoming years. Despite this, the technical analysis of Southern Copper’s stock suggests a potentially favorable situation, with key price levels on the chart indicating important support levels to monitor.
Goldman Sachs recently revised its 2024 China GDP forecast, which could have implications for companies like SCCO that have a global footprint in copper production. Southern Copper is involved in various upstream and downstream activities in the copper industry, as well as mining operations for other metals such as iron ore and molybdenum. The company reported strong financial results in Q2, with non-GAAP EPS of $1.21 surpassing Wall Street’s expectations and revenue reaching $3.1 billion, up 36% from the previous year.
While the first half of the year saw high copper prices, there has been a noticeable decline in recent months. Southern Copper was able to capitalize on the favorable pricing environment by increasing its quarterly copper production by 6.6%. The company’s zinc and molybdenum production numbers also showed robust performance. Despite concerns about the high capital expenditure of $332 million, Southern Copper’s management announced a $0.60 dividend and a stock dividend, signaling confidence in the company’s future prospects.
Looking ahead to the upcoming earnings release, the options market indicates a potential 6.2% swing in SCCO’s stock price post-earnings. Analysts expect an operating EPS of $1.11 on revenue of $2.94 billion. Key risks for Southern Copper include a weaker global economy impacting demand for copper, increased labor costs, higher borrowing costs, as well as geopolitical and regulatory uncertainties that could affect the company’s operations.
From a valuation perspective, assuming a normalized EPS of $4.60 and applying a five-year average price-to-earnings multiple of 21.3, Southern Copper’s shares could be valued at around $98. However, concerns about the sustainability of the company’s earnings growth compared to broader market trends could lead to a downward revision of the P/E ratio. Additionally, SCCO’s price-to-sales ratio suggests that the stock is trading at a premium compared to its peers, indicating potential overvaluation.
Despite lukewarm growth prospects and weak valuation metrics, Southern Copper has demonstrated healthy profitability metrics following a strong year. Share price momentum has been lackluster since the peak in copper prices earlier this year. However, EPS revisions have been positive, with seven upgrades from analysts in the past 90 days.
In terms of technical analysis, Southern Copper’s stock has approached critical long-term support levels in the mid to high $80s after a significant pullback from its peak earlier in the year. Key support levels include areas of polarity from previous price ranges and an uptrend support line. The stock is currently hovering around the 200-day moving average, indicating a potential bounce off this level. Resistance is seen near the $100 mark, with the RSI momentum oscillator confirming the downward price movement.
In conclusion, while there are concerns about Southern Copper’s valuation and the global macroeconomic environment, the technical chart suggests a potential opportunity for investors to consider buying at key support levels. With upcoming earnings on the horizon, it will be important to monitor how Southern Copper navigates the challenges in the copper market and capitalizes on its operational strengths to drive future growth.