Why the Incitec Pivot Ltd (ASX:IPL) share price is falling despite a double-digit earnings and dividend increase

The Incitec Pivot Ltd (ASX: IPL) share price crashed under the weight of expectations as management reported a double-digit increase in underlying earnings and dividends.

But that wasn’t enough for investors who sent Incitec’s share price tumbling 5.1% to $4.02 in after lunch trade – making the explosives and chemical manufacturer the fourth-worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

Only the Elders Ltd (ASX: ELD) share price along with Westpac Banking Corp’s (ASX: WBC) share price and Lendlease Group’s (ASX: LLC) share price are faring worse at the time of writing.

Incitec posted a 10.6% increase in underlying earnings per share (EPS) to 20.9 cents and that’s 3% below consensus earnings.

That doesn’t sound like much of a miss but a lot of good news has been priced into Incitec with the shares surging over 20% in the past six months (before today’s sell-off) to retest its seven-year high.

What’s more, some brokers had been talking up the chance of an earnings beat at today’s results from rising fertilizer prices and strong mining activity.

Management also declared a 6.2 cents per share final dividend, which is a big step up from the 4.9 cents it paid this time last year. This takes the total dividend paid for the year to 10.7 cents per share, or 13.8% more than FY17.

The results are by no means a disaster despite what today’s share price movement may be suggesting. Demand for explosives from miners is strong and helped the group’s Dyno Nobel Americas business post a solid 22% uplift in underlying earnings before interest and tax (EBIT). The business is also winning market share.

Its fertilizer business also recorded a 24.6% increase in underlying EBIT if you excluded the $20 million it made in property sales in FY17. Otherwise, the gain is a more modest 0.7% increase, although I think that’s still a good outcome given the drought in New South Wales and parts of Queensland.

Fellow fertilizer company Nufarm Limited (ASX: NUF) wasn’t so lucky as it issued a profit warning on the back of the dry spell.

Fellow explosives supplier Orica Ltd (ASX: ORI) also reported results recently and it received a warm reception as it beat market expectations.

The question is whether Incitec is looking cheap following its share price drop. The answer is probably “not quite” as I estimate that the stock is trading on an FY19 price-earnings of around 22 times once I factor in a probable consensus downgrade.

I am not saying the stock is expensive though. But if I were to buy shares in a company that’s trading at around a 60% premium to the S&P/ASX 200, it needs to be a company with an unblemished track record and a bright outlook.

The thing is, Incitec seemed a little guarded in its outlook with the company saying it’s entered FY19 with solid momentum but rising gas prices at Gibson Island will pose a challenge.

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited and Westpac Banking. 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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