NEW YORK (TheStreet) -- It was mayhem in May for copper prices as they corrected 7% on the London Metal Exchange on growing fears the Chinese government would cool the property market thereby curbing demand for the metal. To make matters worse, property sales in Beijing, Shanghai and Shenzhen fell as much as 70% during the month as real estate developers delayed offerings.
Our analysis of the decline in both copper prices and copper stocks suggests the selloff in copper stocks has been overdone. Both
Freeport McMoRan Copper & Gold
have lost 22% and 14%, respectively during the last month. These stocks are trading at attractive forward price-to-earnings ratios of 7.25 and 12.19, respectively.
Copper for delivery in three months dropped to an eight-month low at $6,037.50 per metric ton Monday, down 3.9% on the LME. The metal lost 19% during the last one month or so.
During the first quarter ended in March, average price of copper stood at about $7,274 per ton. Average copper price for the second quarter to date stands at $7,230 per ton.
Assuming Monday's closing price as an average for the rest of the quarter, copper prices will end the second quarter at an average price of $6,900 per ton, implying a quarter-over-quarter drop of 5%.
Moreover, if we look at the sales estimates of the stocks, there have been no major revisions made during the last two months, suggesting that this decline in copper prices was expected and has been factored in the revenue estimates. This analysis shows that both Freeport McMoran and Southern Copper may have been oversold.
Freeport's current revenue estimates of $3.92 billion for the second quarter reflect a 7% quarter-over-quarter drop in sales volumes, as expected by the company. For the third and fourth quarter, going by the company's volume estimate and our copper price estimate of $6,750 and $6,900 per ton, revenue is estimated to be $4.3 billion and $5.2 billion, respectively.
estimates, revenue for the second quarter was revised from $3.97 billion at the end of April to $3.92 billion as of June 7, reflecting a 1.2% decline. This came despite a 7% decrease in copper prices during May.
HSBC Tuesday rated Freeport's stock at overweight with a price target of $80, implying a 36% upside over current levels.
On the other hand, revenue estimates for Southern Copper for the second quarter have been increasing. From $1.16 billion in March, estimates have increased 15% to $1.33 billion as of May 26.
SBC assigned a neutral rating to the stock with a price target of $33, implying a 26% upside over current levels.