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Why the Orica share price jumped to a more than 1-year high today

The Orica Ltd (ASX: ORI) share price surged higher this morning after the chemicals company posted its first half result.

The Orica share price surged 6.4% to a more than one-year high of $19.85 at the time of writing. This makes the stock the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with the TPG Telecom Ltd (ASX: TPM) share price and Telstra Corporation Ltd (ASX: TLS) share price taking second and third spots, respectively, on gains of over 2.5% each.

But it’s Orica that I am feeling more bullish about after management posted a 35% increase in underlying net profit of $166.7 million for the six months to end March 2019, while its statutory net profit swung back into the black at $32.9 million compared with last year’s interim loss of $229.3 million.

Gaining leverage

Sales revenue improved 12% to $2.8 billion but the bigger increase in profit shows the operating leverage in the business. Companies with a relatively high fixed-cost base tend to see a disproportionately larger increase in earnings compared to sales as their margin expands as operating conditions improve.

It’s a double-edged sword as the opposite is also true, but Orica is on the right side of the equation with its managing director Alberto Calderon attributing “improved operational performance across all regions of the business, sustainable overhead reductions and improved manufacturing performance” for the earnings uplift.

Problems at its Burrup ammonia nitrate plant detracted from the good results but these issues have been well-flagged with the company announcing last month that it will take a $134 million after tax write-down of the asset.

The good result enabled Orica to increase its interim dividend by 2 cents over last year to 22 cents per share.

Good outlook

Orica also gave a reasonably positive outlook even as it stuck to its November full year guidance with weakness at Burrup offset by productivity gains.

“Going forward we continue to expect stronger EBIT inthe second half of 2019 supported by AN volume growth and firm pricing, further improvement in operating performance and efficiency as well as ongoing growth in Orica’s technology and advanced services offerings,” said Mr Calderon.

I believe Orica will continue to perform well on the back of its results but this isn’t the only stock with a bright outlook.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited and TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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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