MENU

Why Orica Ltd may have become the latest blue-chip to buy

Credit: iStock

Shares in Orica Ltd (ASX: ORI) was one of the best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) on Tuesday with the stock surging 5.5% to a two-month high of $19.48.

A massive valuation upgrade by Morgan Stanley probably had something to do with the sharp rally in the stock with the broker increasing its price target on the explosives and chemicals group to $21.20 from $16.50 a share and changing its recommendation on the stock to “overweight” from “equal-weight”.

Today’s jump marks a dramatic turnaround in sentiment towards Orica after it was sharply sold off in November last year when it posted a disappointing full year result.

“Our forecasts now reflect increased confidence in the commodity cycle. We believe that recent commodity price strength will prove a precursor to expansionary activity,” said the broker.

“We now expect a 4% explosives volume CAGR for ORI over the next three years (vs 2% previously).”

Orica’s explosives are used by miners and the ongoing resilience of the commodities market is expected to prompt many of them to expand or start new mines to meet demand.

The bullish sentiment is already evident in the mining sector with heavyweights like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) outperforming the broader market and other household blue-chip names like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS).

However, this bullish sentiment is yet to spread to Orica with the stock climbing less than 3% over the past 12-months when the ASX 200 benchmark is up 7.6%.

“We believe that renewed confidence in the underlying explosives demand backdrop is increasingly prevalent within the investment community,” said Morgan Stanley.

“However, ORI’s earnings leverage to increased volumes is underappreciated, in our view. We have upgraded EPS forecasts by 3-12% over the forecast period.”

On the other hand, Orica’s peer Incitec Pivot Ltd (ASX: IPL) has not enjoyed the same recommendation upgrade from the broker as it is more exposed to fertiliser prices, which are expecting to moderate this year, according to Morgan Stanley.

Looking for other stocks that are well placed to outperform this year? The experts at the Motley Fool have uncovered three blue-chips that they believe will deliver robust returns in 2018, if not beyond.

Click on the link below to get your free report and to find out what these stocks are.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!