Shares of Fortescue Metals Group Limited (ASX: FMG) are tracking lower from the open today and trade less than 2% in the red at $16.54.
In what's been a profitable year for commodity baskets, the second half of CY2022 hasn't been so rosy. Most raw materials have consolidated gains.
Iron ore, the key ingredient in steel making, has been perhaps the key exemplar of this trend. It has pushed south of record highs and now trades back at pre-pandemic highs.
With the price of iron ore approaching 52-week lows early in the week, this has put pressure on Fortescue shares. It currently rests at US$92.50 per tonne.
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What does this mean for Fortescue shares?
Since the company is one of the largest iron ore producers in the world, it is therefore a price taker on the material, meaning that its share price fluctuates with volatility in the commodity markets.
It comes as no surprise therefore to see that investors have sold off Fortescue in unison with the descent in the iron ore price, as seen on the chart below.
With the sell-off, shares have retreated towards their October 2021 levels. But this has also sweetened valuation multiples relative to peers.
Fortescue now trades on a price-to-earnings ratio (P/E) of 5.32 times and a price-to-book (P/B) ratio of just 1.9 times.
These are slightly behind the GICS Metals & Mining Industry's median of P/E of 10.8 times and P/B of 2.01 times respectively, per Refinitiv data.
The discount might be warranted according to some, however. Jabin Hallihan of investment bank Morgans believes that Fortescue is a sell, in The Bull's 18 Share Tips for 24 October.
"[Foretescue's] capital expenditure guidance to decarbonise its iron ore business by 2030 is $US6.2 billion," Hallihan notes.
"Our estimate was $US5.5 billion, highlighting the inflation risk. Our 12-month price target is $15. There's much to play out in decarbonising the business," he added.
"Other stocks appeal more."
Morgans joins 8 other brokers as a sell recommendation for Fortescue shares, with the remaining 9 split to hold, per Refinitiv Eikon data.
The consensus price target from this is $15.71 apiece, behind the current market value.
Meantime, Fortescue shares are down 14% this year to date.
