Is the Fortescue (ASX:FMG) share price dirt cheap or overvalued?

Where next for Fortescue shares?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Fortescue Metals Group Limited (ASX: FMG) share price was a positive performer on Monday.

The mining giant's shares rose 2% to end the day at $15.80.

This means the Fortescue share price is now up approximately 9% since this time last month.

a man in a hard hat and checkered shirt holds paperwork in one hand as he holds his hands upwards in an enquiring manner as though asking a question or exasperated by uncertainty.

Image source: Getty Images

Is the Fortescue share price a bargain buy?

Opinion on the Fortescue share price continues to be highly divisive, with some brokers believing its shares are vastly overvalued and others believing them to be dirt cheap.

In respect to the latter, the team at Bell Potter continue to see a lot of value in the Fortescue share price.

A recent note reveals that its analysts have a buy rating and $19.75 price target on its shares. This implies potential upside of 25% for investors over the next 12 months.

In addition, the broker expects the iron ore miner to pay a $3.07 per share fully franked dividend in FY 2022. This equates to a very attractive fully franked yield of 19.4%, which stretches the total potential return to almost 45%.

In response to its first quarter update, Bell Potter said: "Strong free cash flows, good cost control and an 'on-track' production performance emphasise the quality of the business and we retain our Buy recommendation."

What about the bears?

One of the most bearish brokers out there is Goldman Sachs. This morning the broker retained its sell rating and $11.00 price target on the company's shares. Based on the current Fortescue share price, this implies potential downside of just over 30% for investors.

There are four key reasons why Goldman is bearish on Fortescue. These include its relative valuation, the widening of low grade iron ore discounts, execution and ramp up risks on the Iron Bridge project, and uncertainties around Fortescue Future Industries (FFI) diversification and Pilbara decarbonisation.

In respect to the latter, the broker believes decarbonising the Pilbara could cost Fortescue over US$7 billion and requires +US$50 per tonne carbon or a green premia to be NPV positive.

Goldman concluded: "We have an Underperform rating on FMGAU. In our view, FMGAU is set to face headwinds from lower iron ore prices and remains an unlikely IG upgrade candidate due to its concentrated portfolio (single-commodity exposure in one region of Australia) and the strategic uncertainty implied by its openness to entering other markets (e.g. renewables). The company is facing execution risk at Iron Bridge from increased project capex and a team reorganization."

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 Bruce Jackson.

More on Broker Notes

A smiling woman holds a Facebook like sign above her head.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

Three people in a corporate office pour over a tablet, ready to invest.
Broker Notes

Brokers name 3 ASX shares to buy right now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Person with thumbs down and a red sad face poster covering their face.
Broker Notes

6 ASX 200 shares downgraded by the experts this week

Brokers have reduced their ratings on six ASX 200 shares, including PLS Group and Westpac this week.

Read more »

Sell buy and hold on a digital screen with a man pointing at the sell square.
Broker Notes

Should you buy Wesfarmers shares amid rising profits and revenues?

A leading analyst offers his outlook for Wesfarmers shares.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Broker Notes

Buy, hold, sell: Evolution Mining, Netwealth, and Nufarm shares

What is Morgans saying about these popular shares? Let's dig deeper into things.

Read more »

Health professional looking at a laptop.
Broker Notes

Is the Telix share price heading to $19? This broker thinks it is

Bell Potter remains bullish on this name. Here's what it is saying.

Read more »

Happy man working on his laptop.
Broker Notes

Broker says this ASX 200 stock can deliver a 20% return

Bell Potter is bullish on this fintech stock. Let's see what is saying about this one.

Read more »

A man holding a cup of coffee puts his thumb up and smiles with a laptop open.
Broker Notes

ASX 200 shares with renewed buy ratings this week

Brokers have signalled ongoing confidence in Zip, ANZ, Coles, and several other ASX 200 shares.

Read more »