Better ASX 200 iron ore share to buy in June: Fortescue or BHP shares?

BHP shares and Fortescue shares have both come down from their highs amid the slide in commodity prices.

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Invest in BHP Group Ltd (ASX: BHP) shares or Fortescue Metals Group Ltd (ASX: FMG) shares in June?

There's a decent case to be made for both.

Or for holding off to see where commodity prices head from here.

But holding off could well see the S&P/ASX 200 Index (ASX: XJO) mining stocks climb higher into July.

So, with that in mind, are Fortescue or BHP shares looking like the better option today?

How have Fortescue and BHP shares been performing?

From a share price perspective, both of the ASX 200 iron ore shares have followed a fairly similar path over the past 12 months.

Since this time last year, BHP shares are down 5.8%.

The Fortescue share price has held up a little better, down 3.8% over the full year.

Now, that doesn't include the two fully franked dividends both of the big miners paid out to shareholders.

The dividends are also similar, though again Fortescue holds the edge here, trading at a 9.6% trailing yield. That compares to an 8.9% trailing yield for BHP shares.

Both of the miners' revenues are closely linked to the iron ore price. And both have an expanding footprint in copper, an important metal for the world's march towards electrification.

BHP's recently confirmed takeover of OZ Minerals Ltd (ASX: OZL) will give it a larger exposure to copper. Though it may take some time for any benefits to show up on the bottom line.

As for Fortescue, it's investing a sizeable amount of its revenue into the green hydrogen ambitions of Fortescue Future Industries (FFI).

While I believe those ambitions may pay off handsomely in the years ahead, becoming an industry leader in green hydrogen production will require a lot more investment. And that investment money comes from shareholders.

With that in mind, I see Fortescue shares as carrying more risk than BHP shares over the medium term.

What half-year results did the ASX 200 iron ore shares report?

The miners both reported their half-year results in February.

With the price of iron ore and copper having come off the boil during the reporting period, the figures were all down year on year.

Here's how BHP shares fared:

And here's what Fortescue reported for the half year:

  • Revenue of US$7.84 billion, down 3.6%
  • EBITDA declined 8.7% to US$4.4 billion
  • Net profit after tax (NPAT) of US$2.4 billion, down 4.7%
  • Interim dividend of 75 cents per share, down 13%

BHP shares had the biggest pullback in profits and dividends.

To break the deadlock then, we defer to the analysts at Goldman Sachs.

Fortescue or BHP shares in June?

Well, Goldman Sachs has a very clear take on which ASX 200 iron ore share to buy right now.

The broker recently confirmed its sell rating on Fortescue shares, with a target price of $15.80. That's more than 22% below yesterday's closing price of $20.36 a share.

Responding to the miner's recent quarterly update, Goldman believes Fortescue shares are overvalued compared to BHP shares, saying "the stock is trading at a premium to … BHP on our estimates".

Goldman estimates Fortescue stock trades at 1.4 net asset value (NAV) compared to 0.95 times for BHP shares.

As for free cash flow (FCF), the broker forecasts FY24 FCF of 4% for Fortescue compared to 7% for BHP.

Goldman recently upgraded BHP from a neutral rating to a buy "based on attractive valuation after the recent ~15% drop in the stock price since January".

The broker has a price target of $49 for BHP shares. That's more than 12% above yesterday's closing price of $43.60 a share.

Motley Fool contributor Bernd Struben 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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