Why the Elders Ltd (ASX:ELD) share price plunged 15% today

Agribusiness Elders Ltd (ASX: ELD) was one of the worst performers on the local market on Friday, with its shares down 15% to $7.13, on a generally negative day of trade for agricultural stocks.

The company released a seasonal update, addressing market commentary on current adverse weather conditions. Elders admitted that the exceptionally dry season in many parts of Australia is reducing the demand for chemical input, reflecting negatively on retail earnings. Furthermore, the company is facing a decline in cattle prices.

These headwinds will have an impact on FY18 performance. Underlying EBIT is expected to be in the range of $70 million to $74 million, compared to $71 million in FY17.

Underlying NPAT should be between $59m and $63m, marginally up from the $58 million of last year. CEO Mark Allison confirmed the 5% to 10% EBIT growth target through the agricultural cycle to 2020.

Investors were disappointed with the update. Elders’ diversified offer of services to the rural economy seemed to grant enough resilience to climate conditions, and the company had managed to grow its underlying profit by 13% in the first half of the year, while industry peers Nufarm Limited (ASX: NUF) and Graincorp Ltd (ASX: GNC), which specialise respectively in agrichemicals and bulk grain handling, slashed earnings.

Elders’ update must have had an impact also on nut producers Select Harvests Limited (ASX: SHV) and Webster Limited Fully Paid Ord. Shrs (ASX: WBA), down 5% and 3% respectively. It’s not surprising that dry weather would hurt nut producers, as nut orchards, particularly almonds, require huge volumes of water.

Foolish takeaway

A bad day of trade or a bad season don’t mean you should avoid agricultural stocks altogether. Some agricultural businesses have solid fundamentals and can be rewarding long-term investments. Elders itself had an outstanding share price run in the last five years, thanks to a well-planned combination of organic growth, acquisitions and cost control.

However, this should serve as a reminder of the volatility that characterises an industry that is so heavily affected by weather conditions.

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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Elders 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 Scott Phillips.

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