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Why Orica Ltd shares plunged 9% lower today

share price boom Orica upgrade

In morning trade the Orica Ltd (ASX: ORI) share price has fallen 9% to $19.41 following the release of its full-year results.

Here are a few key takeaways:

  • Revenue from operations down 1% on the prior corresponding period to $5,039.2 million.
  • Total ammonium nitrate (AN) volumes up 3% to 3.65 million tonnes.
  • Profit after tax up 12.7% to $386.2 million.
  • Profit after tax before individually material items down 0.7% to $386.2 million.
  • Final unfranked dividend of 28 cents per share, bringing its full-year dividend to 51.5 cents per share.
  • Earnings per share of 102 cents.
  • Outlook: Global AN product volumes in the range of 3.65 million tonnes in FY 2018.

Overall I felt this was a reasonably weak result from the commercial explosives company and I can’t say I’m overly surprised to see its shares sink into the red.

Especially as prior to today’s decline Orica’s shares were changing hands at a premium to the market average at 21x earnings.

A research note out of Citi last week advised that the investment bank was expecting earnings per share of 105.3 cents and a full-year dividend of 55 cents. Orica missed on both of these, unfortunately.

Part of the reason for this were increases in material costs that couldn’t be recovered from existing contracts.

Furthermore, its results were impacted by low pricing across explosives and cyanide products, as well as the strong Australian dollar.

While the company does believe that the mining recovery will continue in 2018, it has still forecast flat global AN product volumes next year. Though it is worth noting that it has indicated that volumes could be 5% lower or higher on its guidance depending on a number of factors.

Should you invest?

Even after today’s decline I think Orica’s shares look quite expensive.

In light of this, I would suggest investors stay clear of the commercial explosives company and consider gaining exposure to the resources sector through miners such as BHP Billiton Limited (ASX: BHP) or Santos Ltd (ASX: STO) instead.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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