Intelligent investors are always on the lookout for cheap ASX shares with high-quality business fundamentals to add to their portfolios.
The only issue is that so many "cheap" shares – defined as having low price-to-earnings ratios (P/E) – are cheap because they just aren't valuable companies.
Fortescue Ltd (ASX: FMG) has seen its share price plummet by more than 36% this year. It has underperformed the benchmark S&P/ASX 200 Index (ASX: XJO) by 18% in the past year.
With Fortescue shares now trading at $18.25 apiece, the stock's P/E ratio is just 6.4 times, its lowest range in years.
But is now the time to pounce on this potentially cheap ASX share? Let's see what the experts think.
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Cheap ASX share
Fortescue has faced a tough year, largely due to a sharp decline in iron ore prices. The commodity has dropped from US$142 per tonne in January to US$101 per tonne at the time of writing.
Because it is a price taker on iron ore, the cheap ASX share is sensitive to fluctuations in the underlying resource. This has naturally put pressure on Fortescue's share price.
The iron ore miner's P/E ratio is now 6.4 times, well below the ranges seen throughout the 2018 – 2022 period.
For instance, in 2018, the company finished the year at 13.8 times P/E. In 2019 and 2020, it was 8.3 times and 8.5 times, respectively.
What that means is investors are paying $6.40 for every $1 of the miner's earnings, versus more than $8 in those years.
But despite the challenges, some experts believe the current price presents a buying opportunity.
Auburn Capital sees upside potential at these current valuations. According to my colleague Tristan, Auburn noted the company achieved record iron ore shipments of 53.7 million tonnes in Q4 FY24, a 10% increase from the previous year.
The firm argues Fortescue's shares have fallen to a level that makes them attractive, especially considering the strong operational performance.
It says the current price sees Fortescue "trade at a discount," potentially making it a cheap ASX share.
Morgans agrees with this view. It rated the stock a buy with a price target of $23 in a recent note. This upgrade came after one of Fortescue's institutional investors sold $1.9 billion worth of shares at a discount.
Despite acknowledging the risks and challenges facing the company, Morgans believes these are now priced into the stock, offering a potential upside of 25% from the current price.
It's not all sunshine and rainbows, however. Novus capital is bearish on the company with a $17 per share price target, suggesting the stock might track lower.
Meanwhile, the consensus of analyst estimates rates the cheap ASX share a sell. Safe to say analyst opinions are split.
Foolish takeaway
Fortescue has had a rough year, with the ASX share trading cheap due to a significant decline in iron ore prices. It now trades at a P/E ratio well below the broader market.
Whether this valuation is correct depends on various factors, including the company's performance and iron ore prices. Always conduct your own due diligence.
