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Incitec Pivot has room to grow

Explosives and fertiliser manufacturer Incitec Pivot (ASX: IPL) announced a full-year net profit of $372 million on Tuesday. This impressed the market with the shares lifting more than 7% to close at $2.80.

That’s still well below Morningstar’s fair value estimate of $3.50, with other analysts equally positive. Rival explosives maker Orica (ASX: ORI) has also seen its shares rally hard after posting full-year results this week.

The chemicals and fertilisers Incitec produces are required in agriculture to grow foods around the world. Incitec owns and operates manufacturing plants in Australia, USA, Canada, Turkey, Mexico, Chile and Indonesia. The increasing global population and food demand curve mean its fertiliser products have a nice long-term demand trajectory. With targeted markets like China and India seeing rapid rises in living standards, Incitec aims to leverage off the continued industrialisation and urbanisation of the developing world.

Chief Executive James Fazzino said the result was impacted by external factors including a high Australian dollar, low global fertiliser prices and a decline in demand for explosives sold into the resources industry. It’s these tough trading conditions that have seen the business sold off recently to just above a 52-week low of $2.49.

The company declared a partly franked dividend of 5.8 cents per share, taking the full-year payout to 9.2 cents. That puts it on a approximate yield of 3.3%. Earnings per share were 18.3 cents, placing it on a middling price-to-earnings ratio of 15.

Foolish takeaway

This recent price fall reflects a short-term focus by investors as cyclical conditions such as the high dollar and low fertiliser prices saw the stock sold off. The market appears to believe the worst is over though and the business looks like  an opportunity for investors to take advantage of positive sentiment and a better outlook.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article. 

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