The stock markets may be rallying again but not all stocks are joining the party. I mean, not really. There is little denying that global growth is expected to remain strong for this year and the next, but risks have been rising too. Like in the case of miners. They rallied for much of the past year, but demand for metals is expected to decline now. The FTSE 250 stock Ferrexpo (LSE: FXPO) is one of them.
Why is the Ferrexpo share price falling?
In less than three months, its share price has fallen by some 35%. This follows the reduction in iron ore price forecasts. For instance, Bank of America reduced its forecasts for iron ore prices by 16.6% for this year and by 45% for 2022 late last month.
This follows a fall in demand from China, which had so far propped up metal demand. The government had poured money into the economy to bring it back on track following the pandemic, which resulted in a metals rally. The possibility of a fall in metal prices was further corroborated yesterday as China’s growth came in quite weak. The economy grew only by 0.2% in the third quarter of 2021, compared to the quarter before.
What’s next for the FTSE 250 stock?
But could the Ferrexpo share price get any weaker? This is one question I have been mulling considering its price-to-earnings (P/E). Based on full-year earnings for 2020, its P/E is at sub-5 times. But for 2021, the earnings number is expected to be higher. Based on analysts’ estimates compiled the Financial Times, I estimated the forward P/E to be a minuscule 2.2 times.
Of course forecasts can and do change all the time, based on evolving conditions. But in this case, there are less than three months remaining for 2021 to end. So, unless something really dramatic shakes up the iron ore industry now, I reckon we can expect earnings to be close to the forecast numbers. And any profit-making company is ridiculously cheap at these multiples.
For the sake of argument, I even considered its P/E based on earnings expectations for 2022. They are expected to decline from 2021, but still come in stronger than 2020. As a result, the P/E based for 2022 also remains firmly low at 4.2 times. To me this suggest that its share price could rally from now and well into the next year.
What I’d do
This alone is reason for me to buy the stock. And I have. While it has corrected significantly in the recent months, I think it bears mentioning that over the past year, it has still gained a lot. The Ferrexpo share price is up by 82% since then. Moreover, it has a dividend yield of almost 12%, which makes is one that I plan to hold for a long time.
Manika Premsingh owns shares of Ferrexpo. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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