The term 'blue chip' is used to describe a growing number of companies on the ASX that once might have fallen well outside that category. The likes of Transurban Group (ASX: TCL) and Qube Holdings Ltd (ASX: QUB) have been added to large-cap and blue-chip share portfolios as demand for predictable income from solid assets has soared in the face of diminishing term deposit returns.
Up 81% in 5 months
It stands to reason therefore, that companies we consider not quite blue chips yet, could feasibly become so in the (near) future. One such company that's enjoyed a charmed run of late has been Fortescue Metals Group Limited (ASX: FMG).
The company has achieved a number of investor demands lately:
- Reduced debt to (slightly) more manageable levels,
- Reduced its cost of doing business,
- Retained its strong safety record, and
- Targeted a higher dividend payment in coming years.
Fortescue is slowly transforming itself from a highly-leveraged, high-cost producer to a less indebted and lower-cost producer, similar to blue-chip rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
Is it too late to jump in?
As we've discussed before here and here, there are a number of risks over investing in Fortescue. Fortescue relies heavily on the iron ore price remaining above $50 to aggressively pay down its debt, however there are concerns on both the demand and supply sides which could see the price fall back towards $40 per tonne again.
Analysts also expect revenues to fall over the next few years as Fortescue ploughs through its high grade iron ore and moves onto lower-yielding ore.
Overall, the stock appears priced with more downside than upside, however if the iron ore price remains high, today's price could look like a bargain in two years' time.
