The Fortescue Ltd (ASX: FMG) share price is trading at a low earnings multiple. Most investors, like myself, like to buy ASX shares at a lower price-earnings (P/E) ratio than a higher one.
When I think about a business like Wesfarmers Ltd (ASX: WES), which owns Bunnings and Kmart, I'd prefer to buy it at a P/E ratio closer to 20 than 30. It's currently trading at 31x FY24's earnings.
It's a very different valuation for Fortescue shares; the business is trading at 7x FY24's earnings.
Of course, comparing Fortescue to Wesfarmers is not an apples-to-apples comparison, as they're from different industries. There are plenty of factors we should keep in mind about the current Fortescue share price valuation.
Why the Fortescue share price isn't as attractive as it seems
ASX mining shares usually do trade on a low P/E ratio. Their earnings are not stable or predictable, so investors don't attach a lot of value to near-term earnings.
Fortescue had a pretty good year in FY24, enabling it to generate US$5.66 billion of net profit after tax (NPAT) – up 18% year over year. The current Fortescue P/E ratio is influenced by the strength of the most recent financial year's earnings.
Fortescue's profit is expected to reduce in FY25 amid a generally lower iron ore price. The commodity was worth above US$140 per tonne at the start of 2024, but it's now under US$110 per tonne, according to Trading Economics. The next results may not be as rewarding.
Using the forecast on Commsec for the 2025 financial year, the Fortescue share price is valued at 11.5x FY25's estimated earnings. The earnings forecasts also imply it's valued at 13x FY26's estimated earnings and 15x FY27's estimated earnings. In other words, its profit is forecast to fall over the next few years.
As shown on the chart below, the Fortescue share price has jumped 26% since 10 September 2024. It's nowhere near as cheap as it was a month ago following the jump in the price of iron ore after the announcement of Chinese stimulus measures.
When I'd invest in the mining share
I think investors can make good money with Fortescue shares if we buy at the right time in the commodity cycle and at a cheap valuation. I believe iron ore mining is the sort of industry where the best time to invest is when the resource price is low and there are no positives for the foreseeable future, as it seemed in September.
I'll also be more interested in the company in the future if it's able to capitalise and execute its green hydrogen production ambitions for making fuel, which could be useful for heavy machines (such as planes and ships).
I'm not interested in investing in Fortescue shares at a price above $18. However, if the price dropped below $18, then I'd consider it.
