Buy, hold, or sell: What is Bell Potter saying about Fortescue shares?

Let's see what this leading broker thinks about the iron ore miner.

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Fortescue Ltd (ASX: FMG) shares were under pressure this week.

So much so, the iron ore giant's shares lost over 7% of their value across the five days.

This compares to a 0.9% decline by the ASX 200 index over the same period.

Is this a buying opportunity for Fortescue shares?

According to a recent note out of Bell Potter, its analysts think investors should be keeping their powder dry and waiting for a better entry point.

The broker has put a sell rating and $20.63 price target on the miner's shares. This implies potential downside of approximately 16.5% for investors over the next 12 months.

And while Bell Potter is expecting a decent dividend yield in the region of 7% for investors between now and this time next year, this only limits the potential downside to around 10%.

The note reveals that Bell Potter was unimpressed with the company's performance during the last quarter. It highlights that Fortescue recorded its "biggest miss" in a decade, which means that a stunning final quarter will be required to turn things around. It said:

While we had been expecting a seasonally soft quarter exacerbated by the derailment, this result was below our expectations and was in fact the biggest quarterly production miss (11% below guidance midpoint) in over a decade (42 quarters). FMG needs to ship 54.2Mt (+25% qoq) in order to meet the 192Mt low end of FY24 production guidance. This would also be a quarterly record, 10% above the previous best of 49.45Mt. This is not to say it can't be done: in the month of March, FMG achieved record shipments of 18.7Mt (~56Mt quarterly run-rate). Still, the March quarter production result was the biggest miss in 10 years and FMG now requires its biggest beat in 10 years. Inherently, we see the production risk skewed to the downside and forecast ore shipments of 189Mt for FY24.

In light of the above and due to concerns over subdued steel demand, the broker feels that Fortescue shares are overvalued now. It concludes:

Our NPVbased valuation is lowered 6% to $20.63/sh. We continue to see low growth in global steel demand and downside risks dominating the iron ore price outlook. In addition to this we now see the risk of a production guidance miss as being further elevated after the March 2024 quarter result. Dividend yield as a price support remains a factor, but this will fall away with a lower iron ore price. We retain our Sell recommendation.

Motley Fool contributor James Mickleboro 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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