Fortescue Metals Group Limited: strong top line growth heading into 2014

Sustained earnings growth comes from revenue expansion.

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Many investors first look at earnings and earnings growth to gauge performance, but there are ways, at least in the short-term, that companies can “goose” earnings or earnings per share to improve their stats.

Some of these are cutting costs, selling assets, postponing investment or capital expenditures, as well as share buybacks that shrink the total number of outstanding shares.

Good growth companies have top line growth in addition to the bottom line earnings – increasing the revenue that comes in. Fortescue Metals Group Limited (ASX: FMG) fits that bill, although the ride has been bumpy along the way.

The third largest iron ore miner was having financial issues in late 2012 because of sagging iron ore prices, which put pressure on in light of the mountain of debt built up for production expansion. An unexpected and sustained commodity price rise changed all that, and as the company drove production and sales levels up, it has been able to pay down almost $3 billion of the $12 billion debt.

Actually, operating revenue has been rising since 2008, from $272.2 million to $8.75 billion in 2013. Despite the revenue increases, the GFC brought everything back to earth, and since mid-2009 its share price has been in a trading range of $3-$7. High interest payments on its debt and concerns it may not successfully reach its goal of being the “third force in iron ore” after BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) held it down.

In 2013, NPAT was up 20.6% from $1.37 billion to $1.66 billion, while operating revenue was up 32.5%. It is pushing on with its production capacity expansion plans to 155 million tonnes per annum by mid-2014, but its December quarterly report told of an 8% drop in ore mined, yet there was an 8% rise in ore shipped to 26.7 million tonnes.

Foolish takeaway

If the company can seriously pay down its debt, then earnings will go up, seeing the share price expand. It has attracted foreign investment by way of a joint venture with a Taiwanese conglomerate to the tune of $1.26 billion for its Iron Bridge project.

Interested investors need to keep a close watch on iron ore prices, international supply/demand issues and the performance of the bigger iron ore miners to see where this company will go to.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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