Question

in order to decide whether you should buy sell or hold stocks with Fortescue Metals Group Limited (FMG.AX) an investment recommendation report is needed. The report provides an assessment of the company's current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the company's shares. Your report should make a case for the company's shares to be rated in one of the following ways:

Evaluate the relative historical financial performance of the company among its peers

1.identify the firm's competitors and discuss why they have been selected

Answer 1

It’s really great to see that even after a strong run, Fortescue Metals Group (ASX:FMG) shares have been powering on, with a gain of 34% in the last thirty days. Looking back a bit further, we’re also happy to report the stock is up 89% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Fortescue Metals Group grew EPS like Taylor Swift grew her fan base back in 2010; the 498% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 30% per year. So I’d be surprised if the P/E ratio was not above average.

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, insiders are sometimes wrong, and we don’t know the exact thinking behind their acquisitions.

It’s a pleasure to note that insiders spent US$243m buying Fortescue Metals Group shares, over the last year, without reporting any share sales whatsoever. As if for a flower bud approaching bloom, I become an expectant observer, anticipating with hope, that something splendid is coming. We also note that it was the Founder & Chairman of the Board, John Andrew Forrest, who made the biggest single acquisition, paying AU$243m for shares at about AU$10.98 each.

Along with the insider buying, another encouraging sign for Fortescue Metals Group is that insiders, as a group, have a considerable shareholding. With a whopping US$126m worth of shares as a group, insiders have plenty riding on the company’s success. This should keep them focused on creating long term value for shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. The cherry on top is that the CEO, Elizabeth Gaines is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over AU$12b, like Fortescue Metals Group, the median CEO pay is around AU$6.3m.

The Fortescue Metals Group CEO received AU$5.0m in compensation for the year ending . That seems pretty reasonable, especially given its below the median for similar sized companies. While the level of CEO compensation isn’t a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Is Fortescue Metals Group Worth Keeping An Eye On?

Fortescue Metals Group’s earnings per share have taken off like a rocket aimed right at the moon. What’s more insiders own a significant stake in the company and have been buying more shares. Because of the potential that it has reached an inflection point, I’d suggest Fortescue Metals Group belongs on the top of your watchlist. You should always think about risks though.

Top Competitors of Fortescue Metals Group

• Iron Ore Company of Canada.
• Ferrexpo plc.
• Cliffs Natural Resources Inc.
• Vale S.A.
• Vedanta Resources plc.
• Mineral Resources Limited.
• Companhia Siderurgica Nacional S.A.
• Severstal.