It has been a very disappointing month for the Fortescue Metals Group Limited (ASX: FMG) share price.
At the time of writing, the mining giant's shares are trading a fraction higher for the day at $15.38
This means the Fortescue share price is down 24% since the start of September.
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Is the weakness in the Fortescue share price a buying opportunity?
One thing that you hear a lot in investment circles is never to try and catch a falling knife. This term is used to caution investors against buying a company's shares that are in the process of tumbling lower.
While the Fortescue share price certainly has the hallmarks of a falling knife, one leading broker doesn't believe it is.
In fact, this morning it suggested that investors consider taking advantage of the pullback.
What was said?
According to a note out of Bell Potter, its analysts have retained their buy rating but trimmed their price target on the company's shares to $20.87.
Based on the current Fortescue share price, this implies a potential return of 36% over the next 12 months before dividends.
And with Bell Potter forecasting a $2.45 per share fully franked dividend in FY 2022, this potential return stretches to over 50% including dividends.
Why is the broker bullish?
The note reveals that Bell Potter believes the Fortescue share price has been oversold.
The broker commented: "We have run a range of iron ore price scenarios and conclude that the 44% fall in the FMG share price from its closing high $26.30/sh on 29th July to its close yesterday of $14.75/sh looks overdone."
This is due to the broker's belief that the company can maintain its strong margins and dividends despite the recent iron ore price weakness.
Bell Potter explained: "We find that FMG is in a strong position to maintain strong margins, earnings and dividends. EBITDA margins remain >60% over the forecast period under our new Base Case. Lower forecast iron ore prices do not impact FMG's ability to fund its near or medium term capital or debt servicing requirements under a range of scenarios."
"As a result we leave our assumed dividend payout ratio of 80% unchanged. While our valuation of FMG is sensitive to our long-term iron ore price assumption (which we have left unchanged at US$95/dmt), the bearish near-term scenarios we have run indicate that competitive dividend yields (>5%, fully franked under our lowest case) look like remaining key supports for the FMG share price at current levels," it added.
