Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

Our fair value estimate for Fortescue remains AUD 2.80 per share, with the first-half fiscal 2017 result as expected. Excluding a USD 49 million pretax foreign exchange gain, a balance sheet adjustment, adjusted net profit increased 6 times to USD 1.2 billion. The result was primarily driven by the higher iron ore price. Fortescue realised a 28% rise in the iron ore price to USD 52 per wet tonne while shipments increased 5% to 86 million tonnes. The cost performance was strong, with absolute costs falling 10% and unit costs, excluding royalties, down 20% from a year ago.Our overvalued call reflects our view for lower steel demand from China. We think stimulus in 2016 pulled forward demand in China from future years. Elevated prices have also kept iron ore supply in the market we expected to falter, while some capacity from the domestic iron ore producers in China and Samarco is being encouraged by prices to restart. In addition, the large miners are increasingly turning attention away from straight cost cuts to productivity gains, which involve expanding capacity at little additional cost. If demand for iron ore stagnates as we expect, this should see renewed pressure on high-cost producers and the iron ore price. Fortescue says it expects to can add 2.0 million-3.0 million tonnes of iron ore annually through production creep without any additional capital.There is no change to our no-moat rating. Fortescue lacks a cost advantage, reflecting rapid and expensive expansion during the boom and the lower-grade fines product, which sells at a discount to the benchmark. We forecast return on invested capital of 16% in fiscal 2017, but we think it’s unlikely to persist as the iron ore market comes back into balance.Analyst: Matthew Hodge

Our fair value estimate for Fortescue remains AUD 2.80 per share, with the first-half fiscal 2017 result as expected. Excluding a USD 49 million pretax foreign exchange gain, a balance sheet adjustment, adjusted net profit increased 6 times to USD 1.2 billion. The result was primarily driven by the higher iron ore price. Fortescue realised a 28% rise in the iron ore price to USD 52 per wet tonne while shipments increased 5% to 86 million tonnes. The cost performance was strong, with absolute costs falling 10% and unit costs, excluding royalties, down 20% from a year ago.Our overvalued call reflects our view for lower steel demand from China. We think stimulus in 2016 pulled forward demand in China from future years. Elevated prices have also kept iron ore supply in the market we expected to falter, while some capacity from the domestic iron ore producers in China and Samarco is being encouraged by prices to restart. In addition, the large miners are increasingly turning attention away from straight cost cuts to productivity gains, which involve expanding capacity at little additional cost. If demand for iron ore stagnates as we expect, this should see renewed pressure on high-cost producers and the iron ore price. Fortescue says it expects to can add 2.0 million-3.0 million tonnes of iron ore annually through production creep without any additional capital.There is no change to our no-moat rating. Fortescue lacks a cost advantage, reflecting rapid and expensive expansion during the boom and the lower-grade fines product, which sells at a discount to the benchmark. We forecast return on invested capital of 16% in fiscal 2017, but we think it’s unlikely to persist as the iron ore market comes back into balance.Analyst: Matthew Hodge

Fortescue Makes Hay While Sun Shines, but Excess Returns Unlikely to Sustain

Fortescue Metals

Fortescue Makes Hay While Sun Shines, but Excess Returns Unlikely to Sustain