This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Balance Sheets 101: Who Made the Grade

Freeport-McMoRan Passed

Recently, I discussed the impact of commodity prices on corporate earnings. One of the companies I focused on was Freeport-McMoRan Copper & Gold (FCX - Get Report). In November 2006, Freeport-McMoRan announced that it was going to acquire Phelps Dodge in a cash and stock deal, whereby Freeport-McMoRan would have to borrow around $7.5 billion to complete the deal. From December 2006 to June 2007, Freeport-McMoRan's long-term debt exploded from about $1 billion to $9.6 billion.

When Freeport-McMoRan reported its latest quarterly earnings last week, the company's debt had shrunk to $7.4 billion. How? The new combined company has been using the cash it generates to support its mining operations, repay debt, pay dividends and repurchase stock. Freeport-McMoRan estimated that after paying dividends to common and preferred shareholders that it would have from $3 billion to $4 billion in annual cash flow for investments, debt reduction and share buybacks.

Simply put, Freeport-McMoRan was able to opportunistically use cost savings from its merger and increased cash flow from operations to pay down the debt from the Phelps Doge acquisition. While $7.4 billion is still a hefty amount of debt, Freeport-McMoRan is clearly paring down that debt, while still running a successful mining business. I expect this debt reduction to continue over the next few years.

Freeport-McMoRan's Balance Sheet Grade: B- (and improving).

Best Buy Passed, While Macy's Barley Passed

In retail there are three important components to success. First, sales margins, which are the percentage of sales that a company earns after its cost of goods. Next, same store sales, which quantify the sales increase at stores from one year to another (for stores open at least 13 months). Finally, organic growth, which comes from expansion based on opening of new stores.

Retailers seeking to open new stores do so through two sources: the cash that they generate from their current stores or borrowed cash. Furthermore, retailers carry large amounts of inventory, particularly for the busy winter holiday shopping season. This is typically financed through short-term borrowing, with the hope that inventory sales will pay off the borrowed money, thus earning the company their sales margins. Whether it is new store expansion or inventory control, retailers with strong balance sheets will outperform relative to chains with weaker ones.

Let's look at two retailers.

2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BBY $38.48 0.00%
FCX $18.80 0.00%
M $63.65 0.00%
SIRI $3.85 0.00%
AAPL $123.25 0.00%

Markets

DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs