Australia's major grain handler, GrainCorp (ASX: GNC), released an update to shareholders yesterday, indicating that its net profit after tax for 2014 would drop to around $80-100 million before significant items; approximately one half of FY13's $175 million.
Funds analyst Morningstar estimates NPAT right in the centre of this range at $89 million, although GrainCorp points out that a number of variables such as foreign exchange rates, volume received in the second half of 14 and drought-related uncertainty may contribute to further earnings variance.
It's the latest in bad news for shareholders who have seen the value in their shareholdings fall 35% after the takeover bid by Archer Daniel Midland late last year was blocked by the federal government. Thankfully very few appear to have been caught up in the hype, with the small volumes traded during the takeover (fewer than 1 million shares per day, usually) indicating that a majority of investors held the shares for the length of the takeover offer.
Most devout GrainCorp investors are no doubt a little browned off that they didn't sell at $12 and buy again at yesterday's price of around $8, but hindsight's a wonderful thing. Now that the share price has retreated roughly to where it was 18 months ago, profit has halved, making the share theoretically twice as expensive. Should you be buying, selling, or holding?
Long story short, the answer is holding. Given the uncertainty around the length and severity of the drought and the unlikelihood of foreign takeover attempts in the foreseeable future, buyers can afford to wait for either a better price or the drought to break before making a purchase.
From the opposite perspective, there is no particular reason to sell; shares are near their 52-week low and don't look to be headed any lower after the profit downgrade. As long-term investors will know, GrainCorp is a share to hold for the long term, because earnings in GrainCorp and similar companies are typically lumpy owing to variance in weather and other factors.
Foolish takeaway
There is one reason I would sell GrainCorp right now, and that's if I had a better idea for where to put the money. However investors will be hard pressed to find another share with the same exposure to Australian agriculture as GrainCorp, and may be selling just as a weakening Aussie dollar starts to contribute to profits. I would recommend that investors holding for the long term continue to hold, whilst those looking to buy should revisit GrainCorp a little further down the track.
