The Fortescue Metals Group Ltd (ASX: FMG) share price was under pressure again on Wednesday.
The mining giant's shares sank 4% to $19.99.
This means the Fortescue share price is now down over 14% from the 52-week high of $23.33 it reached in February.
Is the Fortescue share price cheap enough yet?
Unfortunately, the broker community continues to believe that the Fortescue share price is overvalued even after recent weakness.
In fact, I'm not aware of a single broker that has a buy rating on its shares right now.
The most positive broker is arguably Morgans, which has the equivalent of a sell rating and $18.20 price target on its shares. This implies potential downside of 9% from current levels.
Whereas analysts at Bell Potter, Goldman Sachs, and Morgan Stanley all see scope for the iron ore giant's shares to crash over 20% from here. They each have sell ratings on its shares with price targets of $14.45, $15.80, and $14.10, respectively.
What is being said about the miner?
Last week, Goldman Sachs revealed why it is so bearish on the Fortescue share price. One reason is its valuation, the other is its dire free cash flow outlook.
In respect to its valuation, the broker highlights that its shares trade at a significant (undeserved) premium to peers. It explained:
[T]he stock is trading at a premium to RIO & BHP on our estimates; 1.4x NAV vs. BHP at c. 0.95x NAV and RIO at 0.9x NAV, c. 5.5x NTM EV/EBITDA (vs. BHP/RIO on c. 5x/3.5x), and FY24 FCF of c. 4% vs. BHP/RIO on c. 7/10%.
As for its free cash flow, the broker believes its material capital expenditure will mean its dividends come under pressure. It adds:
Uncertainties around Fortescue Future Industries (FFI) diversification and Pilbara decarbonisation and impact on dividend and balance sheet. The 2022 FMG site trip to the Pilbara highlighted ongoing elevated spend to maintain hematite group shipments at ~190Mtpa going forward. Combined with the ~US$7-8bn decarb program, we forecast FMG's capex to increase from ~US$3.3bn in FY23 to US$3.8bn by FY25.
We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company raises ~US$5.5bn of new debt, reduces the dividend payout ratio from the current ~65% in 1H FY23 to ~50% from FY24 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to ~30% by FY26 (in-line with the company's target of 30-40%).
