Results: FMG share price drops 3.57% even as profits surge 195%

The market reaction at a glance

Fortescue Metals Group Ltd (ASX: FMG) today announced record FY19 results to the market.

Even so, FMG’s share price fell around 3.57% when the markets opened, as US-China trade tensions continue to flare and investors look to be growing increasingly wary of risk assets.

As of 11:11 AEST, Fortescue's shares slid even further, dropping by as much as 4.10% to A$7.26 per share.

Even bearing in mind this short-term response, the 2019 financial year has proven to be a significant one for FMG. Off the back of surging iron ore prices, the miner has seen its production volume, revenue and earnings all climb to record-highs.

FMG’s 2019 financial performance in focus

Helped by buoyant iron ore prices, Fortescue Metals Group Ltd beat key earnings estimates and reported $10 billion in revenue when it revealed its FY19 results to the market this morning.

On the top-line, the company reported a significant increase in revenue, coming in at $9,965 million – up from $6,887 million in 2018.

On the bottom-line, Fortescue saw earnings (EBITDA) come in at $6.05 billion, a sizable beat on the average analyst estimate of $5.75 billion, according to Bloomberg Data.

Underlying net profits after tax also climbed, reaching $3,187 million – a 195% increase from the year prior.

These results, as we previously reported, were mostly expected heading into today’s 2019 release, given the significant run-up we have witnessed in iron ore prices over the last 12-months.

Speaking to what further drove these results – besides favourable commodity prices that is – FMG’s Chief Executive Officer, Elizabeth Gaines, noted that it was:

‘Our integrated operations and marketing strategy, record processing, together with our continued disciplined approach to cost management delivered shipments of 167.7mt.’

These record shipments have helped put Fortescue in an enviable financial position, with FMG’s CEO pointing out that during FY19:

'Cash on hand increased to US$1.9 billion at 30 June, while net debt reduced to US$2.1 billion, the lowest level since achieving current production capacity in FY14.'

FMG dividend and buy backs gain ground

With a strong balance sheet in hand, Fortescue Metals Group Ltd has been keenly focused on growing its shareholders’ wealth in recent times.

Firstly, the company revealed an impressive uptick in its final dividend with its full year results today. Here, the company has committed to paying a final 2019 dividend of A$0.24 per share, compared to last year’s final dividend of A$0.12 per share.

Overall, this brings the company’s FY19 dividends to A$1.14 per share and represents a massive 396% increase year-over-year.

Secondly, the company has also committed itself to buying back some A$500 million worth of its own shares.

FMG has already made good progress on this front, having bought back some A$139.2 million worth of its own shares since October 2018. The buy-back is expected to continue unimpeded.

FMG share price: are we at peak iron ore?

Given the bullish run in iron ore prices we’ve seen over the last 12-months, there was good reason for analysts to be optimistic heading into FMG’s 2019 results.

Yet as trade tensions continue to escalate, and as the outlook for iron ore softens, such optimism may come increasingly under pressure in the short and medium-term.

As we noted at the beginning, FMG’s share price was traded down as much as 4.10% in the morning session.

The broader market was hit just as sharply, with the ASX 200 collapsing over 100 points before noon.

Yet even as this turbulence intensifies, for the 2020 fiscal year, FMG has guided for between 170-175mt in shipments – a modest uptick on the company's 2019 shipment figures.

This guidance too, was balanced by the positive statement from Fortescue’s CEO, that:

'We have seen a strong start to FY20 and Fortescue is well positioned to continue to deliver benefits to all stakeholders.’

Further adding to this positivity, the company’s CEO said that Fortescue:

‘Has never been in a stronger position to continue to optimise margins and cashflows, underpinning the resilience in our earnings through all market cycles.'

How this situation will play out in reality though: as iron ore prices have already softened in the last few months, and as the outlook remains uncertain, is anyone’s guess.

Even with today’s sell-off, Fortescue Metals Group Ltd has still delivered market-beating returns year-to-date, rising 73% since January.