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

Sustained earnings growth comes from revenue expansion.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »