Why brokers are bullish about Nufarm Limited (ASX:NUF) despite its devastating profit downgrade

Just about every broker believes Nufarm Limited's (ASX: NUF) sell-off is overdone and have reiterated their buy recommendation even as management warned that earnings would fall 16%.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share price of Nufarm Limited (ASX: NUF) is making a tentative recovery following its brutal sell-off yesterday as brokers remain upbeat on the seed and crop protection products supplier.

The stock is outpacing gains on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) with a 1.3% rally to $7.58 as the broader market rose 0.6% in lunchtime trade.

That is a far cry from the 11% plus flogging the stock received yesterday following a profit warning from management due to bad weather.

But just about every broker believes the sell-off is overdone and have reiterated their buy recommendation on the stock even as management warned that drought conditions would knock up to 16% off its underlying earnings before interest and tax to between $255 million and $270 million in FY18 compared to the previous year when management had originally tipped growth of 5-10%.

To put this downgrade in context, the profit warning means that Nufarm's EBIT for Australia and New Zealand would only come in at $5 million to $10 million compared to JP Morgan's estimate of $45 million.

But that doesn't faze the broker. It pointed out that Nufarm is cheap given that it's trading greater than two standard deviations below its three-year forward price-earnings (P/E) multiple average. The broker has reiterated its "overweight" recommendation on the stock even as it cut its price target by $1 to $9 a share.

Citigroup also believes the sell-off makes for a compelling buying opportunity for the stock and points to the recent acquisition of Arysta LifeScience Inc. by UPL Ltd. to highlight Nufarm's strategic value.

"On our updated forecast, NUF remains cheap against its historical valuations (c8x EV/EBITDA) and in our view, captures little value for its Omega-3 and ANZ businesses," said Citigroup.

"We also highlight NUF's corporate appeal given UPL's recent US$4.2Bn Arysta acquisition implies a strong 10.4x EBITDA multiple."

Supporters of Nufarm are bullish on the longer-term outlook for the company from sales of its patented canola seeds that are rich in Omega-3 oil. Up to now, Omega-3 can only be sourced from fish and having a crop that is enriched with the oil is a game-changer for the industry.

Nufarm is also likely to benefit from its US expansion and from its European acquisitions even though the inhospitable weather means its FY19 earnings are likely to be impacted as well.

But those with a longer-term investment horizon will want to buy into the stock with analysts from Macquarie Group Ltd (ASX: MQG) and Credit Suisse also reaffirming their buy-equivalent call on Nufarm.

I like the stock but I think there is no rush for bargain hunters to buy Nufarm. The next catalyst for the stock is probably in late September when the company reports its full-year results and provides an update on its Omega-3 and overseas expansion.

In the meantime, the experts at the Motley Fool think you should be watching another emerging stock that is outperforming the broader market as it's well placed to continue its winning run in FY19.

Click on the link below to find out what this stock is for free and why it should be on your radar.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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 Scott Phillips.

More on Cheap Shares

Couple at an airport waiting for their flight.
Cheap Shares

Is Qantas a bargain ASX 200 stock today?

Analysts at Goldman Sachs think the Flying Kangaroo could be dirt cheap.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Cheap Shares

1 secretly cheap ASX 200 stock I'm buying for the long run

The best performer on the index last year has had a poor start to 2024. Let's examine whether this is…

Read more »

A young woman sits on her bed holding a cup of coffee inside her recreational vehicle hired through the Camplify website
Cheap Shares

3 struggling ASX shares to buy at a discount

These stocks are down temporarily because of temporary issues. This could be a golden opportunity to buy cheap.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

2 'materially undervalued' ASX 200 shares to buy while they're at 'attractive value'

Is there a better feeling in investing than grabbing stocks for cheap then watching while everyone else catches on to…

Read more »

Five happy young friends on the coast, dabbing and raising their arms in the air.
Cheap Shares

5 oversold ASX shares to buy in March 2024

Will you get 'em while they're cheap?

Read more »

Rocket takes off from the hand of a businessman.
Cheap Shares

11% yield? 2 strikingly cheap ASX shares 'primed for recovery'

Discounted stocks are sometimes a value trap, but experts reckon this pair is ready to soar again.

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Cheap Shares

1 top ASX bargain stock that's ready for a bull run!

The market savaged these shares during reporting season, but multiple experts are bullish for the years to come.

Read more »

Three young women on holidays smile at they look at a map.
Cheap Shares

Long-term investing: 3 top ASX stocks you can buy for under $20 a share

These shares don't cost the earth to add to the portfolio, but all represent businesses going places.

Read more »