Stock Analysis

Here's Why I Think Fortescue Metals Group (ASX:FMG) Is An Interesting Stock

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Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

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). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

See our latest analysis for Fortescue Metals Group

Fortescue Metals Group's Improving Profits

Over the last three years, Fortescue Metals Group has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. As a result, I'll zoom in on growth over the last year, instead. Like a firecracker arcing through the night sky, Fortescue Metals Group's EPS shot from US$1.54 to US$3.35, over the last year. Year on year growth of 117% is certainly a sight to behold. The best case scenario? That the business has hit a true inflection point.

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 14.2 percentage points to 68%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.

ASX:FMG Earnings and Revenue History January 2nd 2022

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Fortescue Metals Group.

Are Fortescue Metals Group Insiders Aligned With All Shareholders?

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, small purchases are not always indicative of conviction, and insiders don't always get it right.

Although we did see some insider selling (worth -US$9.4m) this was overshadowed by a mountain of buying, totalling US$193m in just one year. This makes me even more interested in Fortescue Metals Group because it suggests that those who understand the company best, are optimistic. It is also worth noting that it was Founder & Chairman of the Board John Andrew Forrest who made the biggest single purchase, worth AU$193m, paying AU$19.33 per share.

The good news, alongside the insider buying, for Fortescue Metals Group bulls is that insiders (collectively) have a meaningful investment in the stock. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$219m. I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

Should You Add Fortescue Metals Group To Your Watchlist?

Fortescue Metals Group's earnings have taken off like any random crypto-currency did, back in 2017. 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. It is worth noting though that we have found 3 warning signs for Fortescue Metals Group (1 can't be ignored!) that you need to take into consideration.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Fortescue Metals Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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