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Australian Investment Blog

Uncategorized 03/10/2018

Morgan Stanley see risks in Fortescue's earnings

Stock Fortescue (FMG) $3.74 as at 3/10/2018 Event Fortescue has taken a hit today, off -3.61%, following the release of Morgan Stanley’s (MS) deep dive into the business and the iron ore market. MS initiated coverage on the stock with the equivalent of a sell and a price target that was ~16% below yesterday’s close. The investment bank cites the discount being applied to Fortescue’s lower grade ore as the biggest headwind to the company’s earnings. Chinese steel mill margins remain high and MS expect this to continue as outdated mills slowly go offline, leading to the blow out of the discount for Fortescue’s 58% fe product vs the standard 62% index which peaked at over 40% resulting in FMG missing out on the recent ~20% rise in iron ore price rally. Fortescue have stated in the past that they believe this large discount is a cyclical event and demand for their product will return helping to support earnings, although this is the company talking its own book. They recently announced a launch of a higher quality blended product which will go some way to lift the company’s realized price, although this will only be a small portion of the company’s sold product. Fortescue (FMG) Chart Market Matters Take/Outlook MS see risks to the downside in the companies earning’s vs consensus as a result of their analysis putting pressure on the stock today. We like what FMG is doing at a company level but the price realization largely remains out of their hands. Any sign that the discount is contracting will be good for the stock. Technically, we like FMG into new lows below $3.50

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