|Name of Company||Country of Origin/ Exchange Traded||Sector||Stock Price|
|FORTESCUE METALS GROUP LTD||Australia/
|Basic Materials – Metals & Mining – Industrial Metals & Minerals||AUD3.99|
|@ 30 Aug 2018|
|COMPANY PROFILE||Fortescue Metals Group Ltd is an iron ore producer operating in the Pilbara region of Western Australia. The company has properties in Chichester and Solomon Hematite.
Fortescue Metals Group is an Australia-based iron ore miner. It has grown from obscurity at the start of 2008 to become the world’s fourth-largest producer. Growth was fuelled by debt, most of which has subsequently been repaid. Expansion from 55 million tonnes in fiscal 2012 to 170 million tonnes in 2017 means Fortescue supplies almost 10% of global seaborne iron ore. However, with the iron ore market likely to be well supplied and longer-term demand subdued, we expect Fortescue’s future margins to be below historical averages.
|Valuation Analysis Below|
|The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company. We use the PE Band or Market Cap/EBIT Band to show whether a stock is overvalued or undervalued based on its historical valuation.|
|At the price of AUD3.99 as at 30 Aug 2018, Fortescue Metals Group Ltd is trading at a PE Ratio of 11.0 times last 12 months earnings. This is a 25.3% premium to its historical average Price to Earnings Ratio of 8.8 times. (Price based on the historical average PE of the company is indicated by the red line.)|
|Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock.|
|ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.|
|While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.|
|To find out more about our valuation methodology, click here.|
|Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.|
|Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.|