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Why shares in Nufarm Limited may have found a bottom

Credit: Andrew Stawarz

The share price of Nufarm Limited (ASX: NUF) has tumbled over 6% since February 2 and is hovering close to a one-and-a-half year low. But the stock could be in for bounce in the short-term if Morgan Stanley’s prediction is on the money.

The broker believes there is a 70% to 80% chance the share price will outperform the broader market over the next two months as investors come to realise the stock has been oversold.

Nufarm’s share price has fallen by more than 10% over the past 12 months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has added over 1%.

The stock is also lagging its peers with Orica Ltd (ASX: ORI) and Incitec Pivot Ltd (ASX: IPL) falling 1.7% and 5%, respectively.

There’s no better time for Nufarm to play catch-up. It doesn’t report results till next month so there’s little risk of disappointing investors (assuming it doesn’t issue a profit warning, which is unlikely).

If anything, Morgan Stanley thinks it could unveil a pleasant surprise with its first half earnings announcement that is expected on March 21 in regards to its acquisition of the “Century Portfolio” of crop protection products that it is buying from Adama Agriculture Solutions and Syngenta Crop Protection AG for US$490 million.

“We note that the Century Group deal is progressing through the regulatory approval process with a decision expected in early March,” said Morgan Stanley, who has an “overweight” recommendation on Nufarm with a price target of $11.20.

“We think that the deal is likely to proceed and believe completion of the transaction and NUF’s 1H18 result will be positively received.”

Shareholders will certainly hope so as the clouded outlook for soft commodities and rising input costs has dragged on sentiment towards the stock. At least the stock looks to be stabilising around the $7.85 level.

But Morgan Stanley isn’t the only one who thinks that Nufarm’s depressed valuation is too attractive to ignore. Credit Suisse had also recently upgraded the stock to “outperform” on valuation grounds.

While Nufarm is facing some headwinds, at least its underperformance is driven more so by cyclical factors rather than structural – we are looking at you Myer Holdings Ltd (ASX: MYR)!

Nufarm is looking like an attractive option to me although this isn’t the only stock that appears well placed to outperform. The experts at the Motley Fool are particularly bullish on one niche sector of our market.

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Motley Fool contributor Brendon Lau 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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