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Fortescue Metals Group Limited (ASX:FMG) shares sink to a 2-year low: Is it time to invest?

Earlier today the Fortescue Metals Group Limited (ASX: FMG) share price continued its disappointing run and slid to a two-year low of $3.52.

This meant the iron ore producer’s shares had lost approximately 40% of their value since this time last year.

Fortescue’s shares have come under pressure during this time due to a widening discount on the low grade ore that it produces compared to the in demand high grade ore. This has been caused by Chinese steelmakers’ preference for high grade iron ore which is less polluting.

Is now the time to invest?

According to one leading broker, now could be a great time to pick up shares in the beaten down iron ore producer.

A note out of the Macquarie Group Ltd (ASX: MQG) equities desk reveals that its analysts have an outperform rating on Fortescue’s shares.

Although the broker has downgraded its first quarter shipping estimates for Fortescue after the record shipments in June were followed by softness in July and August, Macquarie continues to believe that its shares are significantly undervalued.

Especially given how they are now trading at a level well below a spot price valuation despite recent improvements in low grade prices.

According to the note, Macquarie has a price target of $4.80 on Fortescue’s shares. This implies potential upside of over 35% for its shares over the next 12 months.

While this price target may seem like wishful thinking, it isn’t that unreasonable. Based on the broker’s estimate for earnings per share of approximately 40.4 cents in FY 2019, Fortescue’s shares are currently changing hands at under 9x estimated forward earnings.

And if they were to reach this price target they would only be priced at a little under 12x forward earnings. I don’t believe this is overly demanding for Fortescue and it is still a reasonable discount to the shares of mining giant BHP Billiton Limited (ASX: BHP).

However, as tempting as this is, I’m not quite ready to take the plunge with Fortescue. But I’m certainly considering it.

In the meantime I think this top dividend share could be the one to buy. It is at the top of its game right now and growing its dividend at a strong rate.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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