MP Materials: Interesting Niche, Intriguing Valuation, Concerning Chart (NYSE:MP)

The Materials sector is a small slice of the S&P 500. The group has outperformed the market, though, over the last year with just an 11% total return loss compared to an 18% drop in the S&P 500 Trust ETF (SPY). One domestic rare earths stock has gotten slaughtered – MP Materials (NYSE:MP) is off by more than 50% YoY despite a series of earnings beats. Are shares now a value? And what clues might the chart offer? Let’s dig in.

Materials Tops SPX YoY

According to Bank of America Global Research, MP Materials owns and operates Mountain Pass, the only scaled rare earth mining and processing facility in the Western Hemisphere. It is located in California. MP owns an estimated 15% of the global rare earth concentrate supply and has plans to ramp up separation capability in 2023E, with further potential to add magnet-making capability. These projects would enable it to be the only vertically integrated rare earths-to-magnet making operation in the Western Hemisphere.

The Nevada-based $4.3 billion market cap Metals & Mining industry company within the Materials sector trades at a near-market 17.8 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.

MP rallied 12% following an earnings beat back in November, and investors hope for more reassuring news in late February when the firm reports quarterly results and this week when the firm speaks at an industry conference. MP is a well-funded rare earth supply chain story that could benefit should geopolitical tensions continue in the coming years, but macro risks are a concern.

On valuation, analysts at BofA see earnings having risen sharply in 2022 with lighter growth seen in 2023. Earnings then re-accelerate in 2024. The Bloomberg consensus EPS outlook is not as optimistic as what BofA sees, though. No dividend is expected as MP’s free cash flow hovers near 0 before an increase several quarters from now.

The forward P/Es on the company are not particularly impressive, but solid growth warrants a strong A- operating forward PEG ratio by Seeking Alpha as the ratio is just 0.69 compared to 1.72 for the sector. Overall, the valuation is intriguing given a decent moat and exposure to scarce rare earth minerals.

MP: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, February 23 AMC. Before that, the management team is expected to present at the 9th Annual Morgan Stanley Auto 2.0 Conference 2023 on January 5. Industry and company-specific updates are often discussed at these events which can cause share price volatility.

Corporate Event Calendar

The Options Angle

Digging into the upcoming earnings report, while not due out until late February, MP is expected to show $0.18 of EPS which would be a 42% drop from $0.31 of per-share profits earned in the same quarter a year ago. On the positive side, the company has a strong track record of topping the consensus earnings estimate with eight consecutive bottom-line beats, per ORATS.

As for the anticipated stock price swing post-earnings, the at-the-money straddle that expires soonest after the Feb 23 earnings date is somewhat high at 9.0%. Comparing that implied move to previous actual changes, 9% could be on the expensive side.

MP: Earnings Decline Expected This Quarter

The Technical Take

Like some Materials sector stocks, MP peaked during the first half of 2022 as commodity prices soared post Russia’s invasion of Ukraine. After notching a high above $60, the stock cratered into the $20s by July and has put in a series of lower highs and lower lows since then. So the trend is clearly lower, and that’s buttressed by a declining 200-day moving average which has been a spot of selling at both MP’s August and November peaks.

Shares now trade near a downtrend support line as well as near the May 2021 low near $23. So, it could be a decent risk/reward spot for a tactical bounce, but I would be a seller should the stock get back to the low $30s based on the longer-term trend. There could even be tough resistance in the $30 to $35 range based on a high amount of volume by price in that area.

MP: Shares Trending Lower, Short-Term Bounce Possible

The Bottom Line

I like the valuation on MP considering its growth outlook. The chart offers a short-term buying chance, but there is resistance just above the current price amid a broader downtrend that could be a risk.