Fortescue Metals Group Ltd (ASX: FMG), one of the largest iron ore producers in the world, has been under the spotlight recently as analysts from Bell Potter expressed a bearish outlook on the company. With its share price facing potential downside, investors are left questioning whether now is the time to hold or sell their positions in Fortescue.
Figure 1: Fortescue Metals Limited
Bell Potter’s Disappointing Outlook
Lowered FY 2025 Guidance
Bell Potter’s analysis highlights several disappointing aspects of Fortescue’s guidance for FY 2025. The company has forecasted iron ore shipments of 190-200 million tonnes (Mt) at a C1 cost of USD 18.50 – USD 19.75 per wet metric tonne (wmt). This is below Bell Potter’s previous forecast of 208 Mt at C1 costs of USD 18.30 per wmt. The downgrade is attributed to a slower ramp-up at Iron Bridge and lower-than-expected hematite production.
High Capital Expenditure
In addition to lower shipment guidance, Bell Potter points out that Fortescue Metals’ capital expenditure guidance has also disappointed the market. The miner has maintained its energy division operating and capital expenditure at USD 700 million and USD 500 million respectively, which is higher than market expectations. Furthermore, a significant USD 700-900 million has been allocated to decarbonisation strategies, increasing the total capital expenditure to USD 3.2-3.8 billion, up from USD 2.9 billion in FY 2024.
Retaining a Sell Rating
Valuation Concerns
Given these concerns, Bell Potter has retained its sell rating for Fortescue Metals ASX shares and lowered its price target from AUD 20.63 to AUD 17.41. Based on the current share price of AUD 20.35, this implies a potential downside of approximately 14% for investors. The brokerage firm cites disappointing guidance and concerns over falling iron ore prices as key reasons for this bearish stance.
Earnings Per Share (EPS) Downgrades
Bell Potter’s report indicates significant EPS downgrades for Fortescue. The firm has revised its EPS forecasts down by 4% for FY 2024, 19% for FY 2025, and 9% for FY 2026. This reflects the weaker-than-expected guidance and higher capital expenditure for FY 2025.
Broader Market Sentiment
Broker Consensus
Bell Potter is not alone in its bearish outlook. Several other major brokers have also issued negative ratings and lowered price targets for Fortescue Metals. For instance, Goldman Sachs has retained its sell rating and reduced its price target to AUD 15.50, citing relative valuation concerns and execution risks related to the Iron Bridge project.
Mixed Analyst Views
However, the broader market sentiment is mixed, with some brokers holding neutral or hold ratings. JP Morgan, for example, has maintained a neutral rating with a price target of AUD 23, although it noted that the FY 2025 guidance was below its expectations.
Dividend Yield as a Silver Lining?
High Yield but Volatile
Despite the bearish outlook, Fortescue Metals has been a market favorite due to its high dividend yield. The company delivered an extraordinary yield of 24.4% in 2018 and is still expected to provide a grossed-up yield in excess of 10% for FY 2024. This could serve as a support for the share price, but analysts caution that this yield might decline if iron ore prices continue to fall.
Conclusion: Should You Invest Now?
Weighing the Risks
There are significant risks associated with Fortescue Metals ASX shares, given several major brokers’ sell ratings and lower price targets. The company’s disappointing guidance, high capital expenditure, and concerns over iron ore prices present a challenging outlook.
Seeking Better Entry Points
Investors might consider waiting for further price corrections before entering a position in Fortescue Metals ASX. While the high dividend yield offers some allure, the potential downside and market volatility suggest caution.
Final Thoughts
Despite its historical performance, Fortescue Metals Group’s near-term prospects are uncertain, given the market’s state and the company’s FY 2025 guidance. Investors should carefully weigh the risks and consider the broader market context before making any investment decisions.
Investors’s Outlook
- As of July 27th, 2024, Fortescue Metals Limited’s stock price stood at AUD 20.35, with a 52-week price range of AUD 19.28 to AUD 29.95.
Figure 2: Fortescue Metals ASX Chart for 1 year
- The market capitalisation of the company was AUD 62.66 billion as of July 27th, 2024.
