Stagnation in the US–China Trade War is weighing on the S&P/ASX 200 Index (INDEXASX: XJO) and the last 2 days have undone last month’s gains, with no bottom in sight. Times like these present opportunities to buy fundamentally sound companies at a discount.
The Fortescue share price has had a turbulent year, with a retracement of -31% from $9.55 down to $6.60 mid-year, then back again to its current price of $9.63 per share. Currently the company is up 131% year to date, which is an outstanding result from a large cap mine.
Why is this interesting?
Fortescue is a one trick pony – it only does iron ore. When a company’s revenue is completely underpinned by a commodity you might assume that the underlying metal price would have a large influence on the share price of the company. If we analyse iron ore price action via NYMEX 62%FE futures contracts we can see that iron is trading at a -30% retracement from its intra year high.
So, if the price of iron is down, why is Fortescue up?
No surprise here. Accounting for 65% of global iron ore imports, China’s rapid urbanisation has paved the way for our exporters to profit big. Globally, the World Steel Association reported in its Short Range Outlook back in mid-October that the Chinese steel demand is expected to grow by 7.8% in 2019. This forecast factors in the booming Chinese real estate market that has been outperforming the past 5 years of historic growth in 2019. It also takes into account the recent Chinese building regulation reform, which has increased structural steel requirements of high-rises thus increasing raw material demand.
In its September Quarterly report, Fortescue reported a 5% increase in shipments of ore along with an eye watering 89% increase in average revenue per dry metric tonne from Q1, thanks to the implementation of autonomous haulage technologies.
Fortescue has worked hard over the last decade to secure its market share within China. As disclosed in its recent FY19 Annual report, Fortescue accounts for 5% of all seaborne iron imports into China. Further supporting the company’s growth potential is a planned joint development project ‘Iron Bridge’ valued at US$2.6 billion supported by Chinese stakeholders.
Second, hard as steel financials.
Excuse the pun, I had to do it.
The financials of Fortescue are extremely sound. What we have here is a competent board of directors that are managing the company in a prudent and logical way – no cowboys here. Looking firstly at the return on equity in FY19 of 31%, which is an increase of 22% from FY18. Earnings before interest, tax, depreciation and amortisation doubled from US$3.18 billion to US$6.04 billion, which is astonishing within a 12 month time frame. Net profit after tax tripled thanks to cost reduction. However, the most supportive metric is that all this revenue growth happened whilst paying down debts and reducing the company’s gearing ratio. Very classy!
Finally, the weak Aussie Dollar.
If you are taking any North American holidays this summer, be ready to cry at your local foreign exchange dealer. Since 2018, the Aussie dollar (AUD) has slid to new lows, then more new lows, followed by more lows. Bad news for travellers, good news for Aussie exporters. You see, when the AUD is weak it makes our commodity exporters products cheaper relative to their global peers. This means that Australian goods are more likely to be purchased over other countries from a pure value point of view. This notion is reflected in the FY19 financials posting a new foreign exchange gain of US$110 million as opposed to only US$29 million in FY18.
Fortescue is a fort of a company. Management is reducing debt, expanding operations strategically with foreign stake holders and squeezing the bottom line harder each year, which really shows that they know how to play their cards right.
If you are looking for a sound iron ore play or just want another ASX 200 company in your portfolio, Fortescue is worth a look.
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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.