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Why Select Harvests Limited shares surged 7% higher today

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The market may have dropped lower in morning trade, but that hasn’t stopped the Select Harvests Limited (ASX: SHV) share price from surging higher.

At one stage the almond producer’s shares were up as much as 7% to $6.11. They have since given back some early gains but still sit 4.5% higher at $5.98 at the time of writing.

Why are Select Harvests shares surging higher?

Investors have responded positively to news that the company plans to launch into the China market with its Lucky nuts brand.

According to today’s release, the company has entered into a five-year trademark license and distribution agreement with PepsiCo Foods (China) for the brand.

The products will be produced and supplied by Select Harvests, but PepsiCo China will be responsible for marketing, sales, and distribution.

Management has advised that it will co-invest with PepsiCo China in marketing to support the launch of the brand in China. Furthermore, both companies will make significant commitments to an advertising and marketing program over the first 18 months of the agreement.

Select Harvests General Manager Consumer Mark Eva believes the agreement is a great opportunity for the nuts brand and the company as a whole.

He stated that: “This allows Select Harvests to participate in the increased consumption of Plant-based Foods, Nuts and Seeds in China, which is accelerating as consumers become more affluent and knowledgeable about the nutritional benefits of nuts and seeds. Our partnership with PepsiCo, who are globally recognised for their marketing, sales and distribution capability, creates a remarkable opportunity for Lucky.”

Should you invest?

I agree that this deal is a great opportunity for Select Harvests, especially with an experienced company like PepsiCo China handling the marketing, sales, and distribution.

But ultimately, the future price of almonds will have the biggest say in the company’s performance in my opinion. Right now, prices appear to be favourable due to Californian frosts earlier this year.

And if they remain this way for the foreseeable future, then Select Harvests could be well-positioned for growth. But it is difficult to know what prices will be in 12 months, making this a risky investment. Especially when its shares are priced at 25x estimated full-year earnings.

Because of this, I would sooner gain exposure to the agriculture sector through more predictable investments such as Duxton Water Ltd (ASX: D2O), Rural Funds Group (ASX: RFF), or Ruralco Holdings Ltd (ASX: RHL).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. 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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