Citi puts FMG on a SELL – What do we think?
A lot to digest for the first day of the trading week with news around Amazon’s purchase of Whole Foods in the US ensuring that Woollies was kept under pressure today with the stock down by -3.7%, the market continued to BUY Bellamy’s with the stock running by +12.95% to $7.94 following last week’s acquisition and capital raising while Citi has taken an axe to their call on Fortescue reducing the price target from $5.80 to $3.90 after cutting their forecasts for Iron Ore – more on this below.
A decent open this morning, a soft middle and a bumper close is probably the best way to describe the trading action today, with an overall range of +/- 37 points, a high of 5806, a low of 5769 and a close of 5805, up +31pts or +0.54%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Citi, Iron Ore & FMG; Citi slapped a sell of FMG (from HOLD) with a very bearish price target while they also reduced their price target for BHP and RIO but maintained their BUY calls. Here are the details;
The obvious question that springs to mind is, has the horse already bolted? We own all 3 stocks and together with Oz Minerals and Newcrest they form 20% of our portfolio. Clearly we have a vested interest here however a few points worth highlighting.
To be clear, we think this call is late and the mkt has already factored in lower Iron Ore assumptions – you can see in the graph below which overlays FMG share price with estimated earnings. The mkt has viewed analysts forecasts as too high and have adjusted the stock price accordingly over time. FMG had a peak at $7.27 and a low of around $4.55 and was actually up today despite the big downgrade.
FMG versus Expected Earnings – analysts late to revise forecasts on way up – Ditto on the way down – share price already factoring lower earnings
Citi Iron Ore price forecasts
Obviously Citi has taken a knife to their expectations for Iron Ore prices but they’ve also sighted the price discounts being applied to FMG’s lower quality Ore. This is a known known with the discount becoming more pronounced in weak markets, and getting less when things improve. In terms of discount, the low here seemed to be in April and the discount has narrowed since then implying the trend is improving. We own FMG from $4.665 and remain comfortable holders.
Fortescue Metals (FMG) Daily Chart
Staying on resources for a second, I did a quick interview with Martin Crabb from Shaw last week about earnings growth etc, and the lower expectations for FY18. A few questions on this today, however the short answer in that earnings growth in the miners was very strong in FY17 and simply cools in FY18. It’s hard to maintain such a pace however the Iron Ore price has also tanked and as we’ve seen from Citi above, analysts are downgrading their expectations here and this has a negative impact obviously on the earnings of the sector.
For instance, and this is from Martin Crabb at Shaw, the earnings per share (EPS) of the mkt peaked on or around the 26th of April and we have fallen 1.7% since then based on 12 month forward. So who are the culprits? Well the forecast profit of the ASX100 stocks is down by $1.3 billion over the period. Fortescue Metals (FMG) makes up $417m or ~40% of the fall. Other larger contributors are shown. (Positive number means a fall in profits).
Source; Shaw and Partners
So the deteriorating earnings profile of the market seems to be driven by the iron ore miners in particular as we cycle forward to lower iron ore prices.
Woollies (WOW) – hit today by -3.7% to close at $25.33 with most of the damage done on open. Amazon’s 13.7bn acquisition of Whole Foods instantly puts the e-commerce giant into 100’s of brick & mortar stores selling groceries. As we said in the Weekend Report & again this morning Walmart was smashed over 7% at one stage on the news as AMZN gave a clear direction to one part of their expansion plans. This is now concerning for both Woolworths and Wesfarmers (Coles) who enjoy BIG margins, well in excess of most supermarkets globally and this makes them ripe for disruption IF Amazon can get their logistics network humming!!
Woolworths (WOW) Daily Chart
Bellamy’s (BAL) – continues to run today adding almost 13% after last week’s news of a capital raising + purchase of a canning facility for $28.5m. In simple terms, BAL got into trouble by relying on others in terms of production and licensing which essentially drove them into a corner and almost ruined them as demand declined.
The deal last week affords them independence to can their own infant formula powder products + it gives them the ability to underpin sales cash flow with contract canning deals with other processors – something they will push for. The cap raising helps their balance sheet but importantly, the canning deal gives them flexibility around production which is crucial with a product with limited shelf life.
All up, the technical picture has improved with BAL and it’s one we’ll put some more time assessing over coming weeks.
Have a great night
The Market Matters Team
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