Now could be the time to take profit on Fortescue Ltd (ASX: FMG) shares.
That's the view of analysts at Bell Potter, which are tipping the iron ore miner's shares to fall meaningfully from current levels.
What is the broker saying about Fortescue shares?
According to the note, the broker has reiterated its sell rating with an improved price target of $21.39.
Based on where Fortescue shares currently trade, this implies potential downside of 23% for investors over the next 12 months.
This bearish stance is based on the broker's belief that Fortescue's earnings and dividends will be in decline after FY 2024 as iron ore prices soften. It explains:
At this stage, FMG remains a pure-play iron ore exposure and its earnings, dividends and valuation are all highly leveraged to the iron ore price. Recent positive Final Investment Decisions (FIDs) have provided some transparency on projects and technologies being pursued by FMG's Energy division, but these are small-scale in comparison with the iron ore business and some years away from production and revenue generation.
Our iron ore price increases result in earnings upgrades of 22%, 57% and 37% and DPS increases of 21%, 56% and 33% for FY24, FY25 and FY26 respectively. While our higher iron ore price forecast results in earnings upgrades, we still model declines in earnings and dividends over our forecast period.
Bell Potter is now forecasting earnings per share of $2.69 in FY 2024, $1.65 in FY 2025, and then $1.41 in FY 2026.
It concludes:
EPS changes in this report are: FY24: +22%, FY25: +57%; and FY26: +37%. Our NPV-based valuation is increased by 23% from $17.37/sh to $21.39/sh. While we have upgraded our prices on unexpectedly supportive factors we still see low growth in global steel demand and a deteriorating pricing environment. Dividend yield as a price support is coming back into play but we retain our Sell recommendation.
