Is the Fortescue share price cheap after dropping 10% in a month?

We check what brokers have to say on the iron ore giant.

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Key points

  • Fortescue shares have fallen this past month, dropping 10% in that time
  • Brokers remain pessimistic on the iron ore miner's stock with no buy calls allocated, according to Bloomberg data
  • In the last 12 months, the Fortescue share price has slipped 14% into the red

The Fortescue Metals Group Ltd (ASX: FMG) share price is tracking lower after its opening spike on Monday and is now trading 0.62% in the red at $19.27 apiece.

After a huge run throughout March and April this year, the Fortescue share price has slipped off the mantlepiece lately and now trades around 10% down over the past month.

Is the Fortescue share price ‘cheap’?

Analysts at JP Morgan aren’t so convinced, noting that Fortescue currently trades within ranges of the broker’s fair valuation of the company.

The broker prices Fortescue at $19 per share, in line with how investors are pricing Fortescue in the market.

JP Morgan said in a recent note:

[Fortescue] continues to trade near our [net present value] NPV. A potential reopening trade in China is positive for iron ore, but FMG continues to trade near its CY22 highs, and this positive thematic looks priced in.

While broadly in line with our NPV, the stock trades with a lower [free cash flow] FCF yield of ~8% vs mining sector peers like BHP at 12%, with FMG also on an [eventerprise value] EV/[earnings before interest, tax, depreciation and amortisation] EBITDA premium (5.4 times vs BHP at 4.4 times).

Sentiment looks low

Analysts at Bloomberg Intelligence adopt a similar posture, noting potential headwinds in the price of iron ore stemming from a slowing in the property market and Chinese demand.

Analysts Yi Zhu and Anthony Cham Fang Yau wrote:

Fortescue Metals is on track to deliver on annual shipment guidance of 185-188 million tons of iron ore in fiscal 2022 ending June.

However, revenue growth will hinge on the iron ore price in fiscal 2H, due to a slowing property sector and a potential decline in China’s crude-steel output.

The company also expects higher costs in the fiscal year due to a shortage of skilled labor, rising fuel prices and increased maintenance expenses.

Despite its positive run so far in 2022, analysts appear to be more pessimistic on the stock relative to other large miners.

Exactly 60% of coverage has it rated as a hold right now, with the remaining 40% of brokers urging their clients to sell Fortescue shares, according to Bloomberg data.

The consensus price target from this list is $17.97 per share, suggesting a small amount of downside potential if the group is right.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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