Fortescue, a record year and more to come

In January of 2016 Fortescue Metals (FMG) had a low of $1.34 spending much of the month trading around $1.50. Of the twenty analysts that covered the stock on Bloomberg at the time, 40% of them had a sell recommendation, 35% were at hold while 25% had a buy. The consensus price target back then was just $1.90 skewed by a couple of bullish outliers, the most bullish being our own Shaw & Partners resource analyst Peter O’Connor with a buy and $2.70 price target. He remains the no 1 Bloomberg rated analyst on FMG - he’s obviously called it pretty well and is still keen on the miner, particularly after the recent pullback – I tend to agree.

Today, Fortescue announced a strong +5% beat in terms of NPAT and a nice +24cps fully franked final dividend which was at the high end of expectations – the result was a solid one despite the share price suggesting otherwise. The record profit of $US3.2b was thanks to the iron ore price tailwind seen in the second half of the year, with the total FY19 dividend landing at $1.14 fully franked, or in other words, an 85% yield based on that January 2016 low.

They maintained their outlook for 170-175mt in shipment expectations for FY20, and importantly costs are expected to be in the range of $US13.25-13.75/wmt, an increase from the FY19 average of $US13.11/wmt, however that’s reflective of industry wide pressure and shouldn’t come as a surprise to the market.

Fortescue Metals (FMG) Chart

While it’s hard not to be concerned about global trade issues and the subsequent decline in the iron ore price in the short term, it’s also hard not to be impressed with the recent scorecard from the West Australian miner. We expect iron ore prices will continue to be whipped around for a variety of reasons however our analysis suggests that a price range of US$90-110 is reflective of present supply and demand dynamics.

It’s also worth noting that we’re in a seasonally softer global supply window following the typically seasonally strong - and in this year’s case record June Quarter shipments.

I appreciate that it's dangerous to look at earnings based on spot commodity prices, however looking at the trends here can be worthwhile. The below charts looks at S&P earnings expectations in orange, consensus in blue and using spot prices in green – the trend here still points to further upgrades in FY20.

Today’s was a record result from Fortescue and it would be doing them an injustice if we didn’t frame it as such. Although the stock is down more than 20% from its highs, and 5% yesterday alone,  it’s still up ~90% over the past 12 months. The recent pullback presents an opportunity in my view. 

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