Is Fortescue Metals overvalued?

Fortescue Metals scaled to multiple new highs throughout 2020, benefitting from surging iron ore prices, record production numbers and unrelenting shareholder enthusiasm. Shares in the Aussie iron ore miner closed at a record $25.92 on Thursday, up 133% from this time last year. Four years ago, the shares were trading at a mere $1.64.

Despite trading at an all-time high, with a market cap of almost $80 billion, Fortescue’s price-to-earnings (P/E) ratio is relatively low 11.6, almost half of BHP's ratio of 20.5.

Even with mixed analyst consensus ratings, enthusiasm around the stock has remained high, following a record set of FY20 production results in August, where FMG reported record shipments, higher earnings and profits, as well as an 8.8% final dividend – bringing the company’s full-year payout to $1.76 per share.

In December, Fortescue released an investor and media day presentation highlighting its record first-quarter operating performance for FY21. For the period ending 30 September, the company declared a shipment of 44.3 million tonnes of iron ore, reflecting a 5% lift on the previous corresponding period. The share price was also buoyed by a lowered full-year iron ore forecast by Brazilian rival Vale SA, expected to benefit Aussie miners.

Currently, demand remains high with China as the country is motivated to secure prices for its record steel output. Whether trade war escalations will be extended to iron ore remains to be seen, likewise the ability for prices to remain elevated.