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Why the Fortescue share price is up 100% – and could be better value than Rio Tinto or Newcrest

Lachlan Hall
is it a buy

The Fortescue Metals Group Limited (ASX: FMG) share price has doubled in value in 2019 on the back of the resources rebound and higher domestic equities – but have Fools missed the growth boat or could the shares double again?

Why has the Fortescue share price exploded this year?

One of the biggest drivers in the Fortescue share price has been the global resources rebound which has seen the price of many key commodities bounce back from a disappointing end to 2018.

Fortescue is a major producer of iron ore, which has seen prices rise to US$110 per tonne for the first time in 5 years as a rebound in Chinese demand and supply-side factors in Brazil (Vale SA reduced output) and Australia (Tropical Cyclone Veronica) have sustained higher prices in recent months.

In its February half-year results, Fortescue reported US$644 million (A$942 million) in net profit after tax and US$1.6 billion (A$2.34 billion) in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) in what was a strong result for the Aussie miner.

Why is the Fortescue share price better value than its peers?

As we enter the second half of the year, it’s worth noting the broadly strong start to the year that the S&P/ASX200 Index (ASX: XJO) as a whole has enjoyed, with Fortescue being a major part of that success.

Fortescue currently boasts a market cap of $26.1 billion and is no small player in the Resources sector, despite being short of the likes of BHP Group Ltd (ASX: BHP) which has a $133.0 billion valuation.

BHP, as one of the largest companies in Australia, is clearly in the value basket and trades on a P/E multiple of 16.6x earnings while still only offering a 0.70% dividend yield to its investors.

In comparison, the Fortescue share price has surged over 100% so far this year to $8.53 per share at the time of writing and trades marginally higher at 21x earnings with a handy 2.7% dividend yield on offer.

I think on a relative value basis there is a compelling case that Fortescue is still good value at its current price and is significantly outperforming its large-cap Resources peers such as Newcrest Mining Limited (ASX: NCM), which in itself has surged 37% higher this year.

However, when you consider the 78.7x earnings multiple and 1.19% dividend yield, it’s hard to go past Fortescue as a top growth option – especially if the technical environment for global resource prices remains robust in the second half of the year.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019