I cannot think of another phrase for a profitable FTSE 250 stock that has a price-to-earnings (P/E) of around only 5.5 times than ‘absurdly cheap’. The stock I am talking of is the iron ore miner Ferrexpo (LSE: FXPO).
Not only is it cheap, the miner’s share price has actually declined in recent months. After touching all-time highs in May this year, it has tumbled by some 13%. Considering both this trend and its low P/E, the question I now face is which of these two facts should I give more weight to?
How do Ferrexpo’s fundamentals look?
To answer this, I took a closer look at its fundamentals, which appear quite good.
It released a healthy production update for the second quarter of 2021 yesterday, with a 5% increase in iron pellet production from the quarter before.
Recently, its board also approved of early repayment of its debt facility, which was signed in 2018 and was due to be paid every quarter between 2020 and 2022. Ferrexpo says it has been able to do this because of its performance as well as supportive market conditions.
All of this is in addition to the already strong financials it has shown in the recent past. Both the company’s revenues and its net income have been rising consistently for the past two years. Moreover, if iron ore prices remain strong, I reckon that Ferrexpo can continue to perform well.
Supportive macro environment for the FTSE 250 stock
I think Ferrexpo can continue to perform well. The impact of the pandemic has started easing as people get vaccinated, which bodes well for the economy. Industrial metal prices are correlated with the economy, so it follows that they should stay elevated too. Also, governments in the US and in China have given a fillip to commodities with their infrastructure programmes. This too, should keep miners in a strong place.
The flipside here, of course, is that as and when these supportive policies are withdrawn, commodities can slump. In any case, it is a cyclical business, which fluctuates with where we are in the business cycle. So when buying a stock like Ferrexpo, I always run the risk of a crash in price over time.
My takeaway
At present, though, I am positive on the stock. I do not think any government will withdraw public spending in a hurry. The economy is expected to bounce back later in the year and into next year. And commodities stocks right now, are a protection against inflation. As long as commodity prices rise, their margins are unlikely to be impacted as much by an overall price rise. This is in stark contrast to say, a fast fashion retailer that competes on price.
So, I think it is only a matter of time before its share price trend reverses and Ferrexpo starts rising again. Until then, I like the idea to buying it on dips.