Almond producer Select Harvests Limited (ASX: SHV) has seen its share price recover from a 52-week low of $3.73 earlier this month to the current price of around $4.85.
The share price had plunged as much as 72% from its peak of $13.64 in August 2015.
Today, the share price is up 3.6%, but bargain hunters may be getting more than they bargained for, with a handful of potentially negative risks to the company.
Almond prices are still falling, as the following chart from Almond Investors Limited shows.
As much as Select Harvests says it can ride out the storm from current low prices, the US is producing record shipments of almonds. US almond shipments in February were 155 million pounds, nearly 11% higher than the same month in 2015.
In mid-March, almond trader, Primex International said almond prices should stabilise, with the optimistic view being a slow gradual increase in prices.
The record high prices achieved last year also coincided with a massive drought in California – the world's largest almond producing region, so it's unlikely that almond producers will realise those prices anytime in the near future.
While Select's valuation may look cheap, a trailing P/E ratio of just under 6x 2015 financial year (FY15) earnings, FY16 earnings are likely to be much lower – hampered by lower prices and lower production. Annualising the first half results suggests a P/E ratio of 8.4x.
Select expects to produce 13,700 tonnes of almonds this year, down from 14,500 last year. In FY15, the producer averaged $11.45 per kilogram but expects to average $9.00/kg in 2016. That may be too high, given the average price in February 2016 was ~$7.35, and prices still appeared to be falling.
That could force Select to cut its final dividend when it reports in August 2016 – making the current trailing dividend yield of over 11% misleading.
Foolish takeaway
While I've always admired the business, like all commodities businesses, Select Harvests depends heavily on the prices it receives for its almonds. 2016 could turn into a year shareholders might want to forget.
