Does Fortescue Metals Group (ASX:FMG) Deserve A Spot On Your Watchlist?

By
Simply Wall St
Published
December 16, 2020

Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Fortescue Metals Group (ASX:FMG). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Fortescue Metals Group

Fortescue Metals Group's Earnings Per Share Are Growing.

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Fortescue Metals Group has grown EPS by 32% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. The good news is that Fortescue Metals Group is growing revenues, and EBIT margins improved by 6.4 percentage points to 54%, over the last year. That's great to see, on both counts.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

ASX:FMG Earnings and Revenue History December 16th 2020

You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Fortescue Metals Group's future profits.

Are Fortescue Metals Group Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

The good news is that Fortescue Metals Group insiders spent a whopping US$243m on stock in just one year, and I didn't see any selling. As if for a flower bud approaching bloom, I become an expectant observer, anticipating with hope, that something splendid is coming. It is also worth noting that it was Founder & Chairman of the Board John Andrew Forrest who made the biggest single purchase, worth AU$243m, paying AU$10.98 per share.

On top of the insider buying, it's good to see that Fortescue Metals Group insiders have a valuable investment in the business. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$227m. This suggests to me that leadership will be very mindful of shareholders' interests when making decisions!

Does Fortescue Metals Group Deserve A Spot On Your Watchlist?

You can't deny that Fortescue Metals Group has grown its earnings per share at a very impressive rate. That's attractive. On top of that, insiders own a significant stake in the company and have been buying more shares. So I do think this is one stock worth watching. Before you take the next step you should know about the 3 warning signs for Fortescue Metals Group (1 is potentially serious!) that we have uncovered.

The good news is that Fortescue Metals Group is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


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