Shares in iron ore juggernaut Fortescue Metals Group Limited (ASX: FMG) finished the session more than 2% in the green on Tuesday and closed the day at $21.12.
The gain extends a short-term rally that Fortescue shares have embarked on since mid-November, amid a positive upswing in the price of iron ore around the same time.
Shares bounced from a low of $13.95 apiece in November and have gathered support at each new high along the way until the open on Wednesday.
Yet, despite the strengths rolling into 2022, not all are as rosy on the outlook of the Fortescue share price. Here's what the team at Citi are saying about the outlook for Fortescue investors.
A bridge too far?
Given Fortescue's core operations are shifting out of iron ore, analysts at investment bank Citi downgraded its recommendation on the company to a sell on grounds of valuation.
Underpinning the broker's decision was its assessment of Fortescue Future Industries (FFI) which Citi feels presents with "unreasonable" expectations on valuation. The firm says "we don't think it possible for [FFI] to bridge the valuation gap – the math is just too demanding".
Even though iron ore pricing has regained strength in recent months, it is still trading well off single-year highs at US$120.5/tonne at the time of writing.
Not only that, but Fortescue's share price has accelerated north at a faster pace versus the raw ingredient, a fact Citi alludes to in its note to clients.
However, the broker acknowledges this as an upside risk to its sell rating if iron ore rallies towards its previous highs once again. Nonetheless, it was hard for Citi to look past the valuation gap in light of key staff departures and the likelihood that iron ore will remain bottom-heavy.
"While iron ore prices have surprised to the upside and dividend yields for the iron ore names remain robust, there's now a large valuation gap between Fortescue and peers", it says.
The broker also notes that a valuation of approximately $11.3 billion is required on FFI to close the gulf in valuation, a feat that would require more than 20 projects and capital expenditure of over $40 billion.
Citi concluded from its examination that "at this early stage, and with no visibility, this seems a bridge too far".
What are other brokers saying?
Whilst Citi is bearish on the outlook, analysts at Macquarie and Bell Potter each recommend the stock as a buy right now.
However, scoping out the list of analysts covering Fortescue provided by Bloomberg Intelligence, 45% recommend the company as a sell, whereas 35% have it as a hold. Just 20% of coverage reckon the iron ore giant is a buy at the current standing.
Moreover, the consensus price target for Fortescue in 2022 now sits at $15.72, which, at the time of writing, implies a downside potential of 34%.
Goldman Sachs is one of the most bearish and values Fortescue at just $11 per share whereas Morgan Stanley has it as a sell at $14.05.
In the last 12 months, the Fortescue share price has fallen 16% but has started the year to date up 10%. The gains come after shares have rallied almost 17% in the previous month of trading for the $65 billion company by market cap.
