Motley Fool Australia

Is the Fortescue share price too expensive?

Growth of ASX 200 tech shares represented by man's hand grabbing onto red ladder that is pointed towards sky
Image source: Getty Images

The Fortescue Metals Group Limited (ASX: FMG) share price has been a big success story in 2020.

Shares in the Aussie iron ore miner have rocketed 61.2% higher this year. Many would point to a surging iron ore price as the key factor.

However, shares in rival miner BHP Group Ltd (ASX: BHP) have actually fallen this year. So, what’s going on with the Fortescue share price and is it too far gone to buy?

Why Fortescue’s value is surging

The Fortescue share price climbed a further 4.3% higher yesterday and hit a new record high of $17.55 per share.

That came after the Aussie miner beat its upgraded export target and said it can maintain that in the year ahead.

Fortescue shipped 47.3 million tonnes in the last quarter and 178.2 million tonnes for the year. That smashed expectations and saw the miner’s shares soar higher.

After yesterday’s performance, Fortescue is fast becoming one of the hottest ASX shares on the market this year. 

Is the Fortescue share price too expensive?

Despite trading at an all-time high, Fortescue’s price-to-earnings (P/E) ratio is surprisingly low.

The Aussie iron ore miner trades at a 7.8 multiple which is nearly half that of BHP (14.6). Granted, Fortescue is more of a pure-play iron ore miner compared to BHP which has significant other interests like petroleum.

But with strong growth forecasts for the year ahead and high iron ore prices, a P/E of 7.8 seems remarkably cheap.

One factor that does weigh on Fortescue is its iron ore quality. Fortescue sells ore with a lower purity compared to its rivals which means it does fetch a lower price.

However, I still think that it could be a good value buy given what the relative valuation metrics are saying right now.

Given the strong success this year, I think many investors would be hoping for a tasty dividend in the company’s August results.

That would be great news for investors particularly in the current market where ASX dividend shares are hard to find.

What other shares are there to watch in August?

I think all of the top performers in 2020 are worth watching. That means I’d include A2 Milk Company Ltd (ASX: A2M) and Afterpay Ltd (ASX: APT) as ‘must watch’ ASX shares in August.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk and AFTERPAY T FPO. 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.

Related Articles…