This morning the Orica Ltd (ASX: ORI) share price will be on watch after the world's largest provider of commercial explosives reported its half-year results.
Key takeaways for the six months ended 31 March 2017 are as follows:
- Revenue fell 4.5% compared to the prior corresponding period to $2,437.4 million.
- Profit after tax rose 31% to $195.2 million.
- Total ammonium nitrate volumes of 1.78 million tonnes, up from 1.71 tonnes a year earlier.
- Business improvement initiatives delivered net benefits of $53 million.
- Interim partially franked dividend increased 14.5% to 23.50 cents
- Half-year earnings per share of 51.8 cents.
- No change to full-year outlook
Overall I felt this was a mixed result and can't help but think it isn't enough to justify its shares trading at an 18-month high.
Based on today's result and its last close price, Orica's shares are changing hands at a little over 16x trailing earnings.
Whilst this is a reasonably undemanding multiple compared to the rest of the market, its shares have had a tendency of trading below 14x earnings in the last five years.
So for its shares to trade at a higher level, I feel the company has to be performing far better than it is currently.
Especially as the company's profit growth is largely the result of its business improvement initiatives.
Although the savings made were impressive, I'm not sure if these improvements can go much further from here. So the company won't necessarily be able to rely on them to boost its earnings moving forward.
For the full-year management has reiterated its outlook that earnings will be flat year-on-year, believing that its business improvement initiatives will be offset by the headwinds it faces.
Should you invest?
In my opinion investors would be better off avoiding Orica and rival Incitec Pivot Ltd (ASX: IPL) for the time being.
Both look reasonably expensive given their respective outlooks and I believe there are far better options out there for investors.
