Should you buy into Ruralco Holdings Ltd's half-year earnings jump?

Shares in the diversified agri-business group jumped this morning after it delivered a doubling in net profit. But is it too late to buy the stock?

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Diversified agri-business Ruralco Holdings Ltd (ASX: RHL) rallied to its highest level this month after it posted a big lift in earnings.

Shares in Ruralco jumped 3.7% to $3.63 in early trade but the big question for investors is whether the earnings news is enough to break it out of its year-long trading band of between $3.40 and $3.80.

I think it just might as the stock is looking cheap in my book given that it trades at a big discount to the sector even though its profit growth stands in contrast to that of its peers like Graincorp Ltd (ASX: GNC) that reported a 40% slump in profit and Bega Cheese Ltd (ASX: BGA), which came out this morning with a profit warning.

Ruralco's first half net profit has doubled to $10.5 million as revenue jumped 36% to $742.8 million for the six months to end March.

Management has also lifted its interim dividend by 1 cent to 9 cents a share.

While its bottom line got a big boost from the recent acquisition of water systems company Total Eden, the group's other business units have reported decent growth.

For instance, gross profit from its agency business (this includes the marketing of livestock and wool) is up 18%, while gross profit from its financial services arm climbed 4%.

If you were looking for exposure to growing Asian demand for Australian agriculture, Ruralco is a stock to consider as the group has started a new cattle export business.

Ruralco's outlook is generally positive even though drought conditions in northern New South Wales and western Queensland are a drag.

Early rainfall across most cropping regions, a weaker Australian dollar and strong offshore demand for Australian food products should ensure the group's earnings growth momentum is sustained for the year, if not beyond.

What's more, even with the share price jump today the stock is trading on a forecast 2014-15 price-earnings (P/E) multiple of under 14 times when its peers are trading on 20 times or more.

I know it's hard to make a fair comparison as one agri-businesses is generally very different from another, but I think Ruralco should be trading on a P/E that's closer to 15-16 times.

This implies a share price that's comfortably north of $4 a share.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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