Is the Fortescue share price really the cheapest ASX 200

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The Fortescue Metals Group Limited (ASX: FMG) share price has come under pressure this month amid weakness in the iron ore price.

Since the start of June, the mining giant’s shares are down 10%.

Is the Fortescue share price cheap?

Following this decline, the Fortescue share price is now trading at $18.00. Based on this and FY 2021’s earnings per share of $4.43, this means that its shares are changing hands for just 4.1x earnings.

However, it is worth remembering that the market is more interested in what the future holds than in what happened in the past.

FY 2021 was an incredible year for Fortescue. And while FY 2022 will go down as a very good year, it won’t stop the company from posting a big decline in its earnings.

Goldman Sachs is expecting earnings per share of US$2.00, which equates to $2.90 per share in local currency. This means that Fortescue’s shares are trading at 6.2x forward earnings.

Let’s now take a look at how this compares to other ASX 200 mining shares:

  • BHP Group Ltd (ASX: BHP) shares trade at 6.1x FY 2022 estimated earnings
  • Rio Tinto Limited (ASX: RIO) shares trade at 6.2x FY 2022 estimated earnings
  • South32 Ltd (ASX: S32) shares trade at 5.3x FY 2022 estimated earnings

As you can see above, based on price-to-earnings (PE) multiples, the Fortescue share price is no cheaper than the rest of its peers.

What about other multiples?

While PE multiples are a popular tool for investors to use for share market valuations, they’re not used widely with mining shares. Instead, price to net asset value (NAV) and EBITDA/EV multiples are seen as better suited for mining valuations.

This is important, because if you rely on PE multiples to value mining shares, you may end up buying shares that you think are cheap, but the rest of the market thinks are expensive.

The Fortescue share price is actually a prime example of this.

Goldman Sachs recently explained why Fortescue shares are actually expensive compared to the likes of BHP and Rio Tinto. This is despite its outlook being much weaker than the others.

The stock is trading at a significant premium to BHP & RIO; c. 1.7x NAV vs. RIO & BHP at c. 0.9x NAV & 1.1, c. 6.5x EBITDA (vs. BHP & RIO on c. 4x), and c. 4% FCF vs. BHP & RIO on c. 11-13%.

In light of this, the widening of low grade 58% Fe product realisations, execution and ramp-up risks on the Iron Bridge project, and uncertainties around its Fortescue Future Industries (FFI) diversification and Pilbara decarbonisation plans, Goldman has a sell rating and $13.50 price target on Fortescue’s shares.

This implies potential downside of 25% for investors over the next 12 months. Food for thought.

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