Why Nufarm Limited's share price is getting cropped today

There's a disconnect between soft commodities and Nufarm Limited's (ASX:NUF) share price. Have shares in the crop protection company hit a medium-term peak?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What's eating Nufarm Limited (ASX: NUF)? The crop protection chemical supplier is among the biggest losers on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this afternoon and there's no company news driving the selloff.

The stock has shed 3.8% to $7.43 in after lunch trading but Nufarm is still trading within striking distance of June's five-year high and is up a whopping 73% over the past 12 months.

Interestingly, agriculture prices have slumped around 10% over the same period, which should spark questions about whether there's a disconnect between the two.

While the price of grains and food related commodities have been under pressure from the firmer US dollar, the fall in soft commodities coincides with a bigger sell off in hard commodity and energy prices.

The outlook for metals and oil is downbeat at best due to slowing economic growth stemming from China and Europe, and I can't help but think that the headwinds constraining the raw ingredients used to power economies also extend to food.

I wrote in March that there was further upside to Nufarm's share price when it was trading comfortably under $7. I think there isn't much upside left in the stock and it's not only due to falling agricultural prices.

Australian meteorologists have been warning of an El Nino for some months now, and if the severe drought comes to pass it will impact on Nufarm's key markets.

Ironically, a bad drought in Australia's "food bowl" will help to lift soft commodity prices but that outcome will be of little help to Nufarm.

The other issue is that the consensus forecasts of 20% earnings per share (EPS) annual growth for Nufarm in 2014-15 stems largely from cost cutting with management targeting at least $100 million in cost savings by 2018.

That's significant given that its earnings before interest, tax, depreciation and amortisation (EBITDA) was $269 million in 2013-14, but I doubt that Nufarm can sustain a 20% EPS growth momentum into 2015-16 (like most analysts are expecting) on cost cutting alone if there is no top-line growth.

The stock is trading on a price-earnings (P/E) multiple of 16x for the current financial year, and while that doesn't look expensive for a stock with solid predictable earnings growth, I think Nufarm might struggle to fall into this category given the cloudy outlook for soft commodities.

Further, other similar stocks on the ASX like Incitec Pivot Ltd (ASX: IPL) and Ruralco Holdings Ltd (ASX: RHL) are trading on P/Es around 13x and it's difficult to get excited about Nufarm unless the stock is trading closer to that level.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »