The Graincorp Limited (ASX: GNC) share price is down 11.34% in 2019 and I think it’s a good time to buy.
Background on Graincorp
Graincorp is a provider of grains to the domestic and international markets. Its activities consist of processing, storage, transport and marketing of grain products. The main products the company supplies to customers are wheat, barley, and canola. The group has a market capitalisation of $1.97 billion.
Why I think Graincorp is a buy
Graincorp has a price to earnings ratio of 24.22x which may seem high against the ASX200 with a price to earnings ratio of 18.21x at the time of writing. Additionally, the group has warned that a loss is pending for the 2019 financial year, citing disruptions to international grain trading and drought in Eastern Australia as the reasons for this. These losses, however, are nothing to panic about – in my opinion.
Prior to the 2019 financial year, Graincorp posted positive earnings every year in recent memory. It also paid dividends. Graincorp now has a grossed-up dividend yield of 1.07%, a little low but a good sign that the business has been tracking along well.
While it may currently be having a bad year, management has made sure to explain that the conditions causing these difficulties are temporary. The market, however, seems to be treating this stock as though it will face bad times forever.
Graincorp has also announced that it has entered into a grain securing contract for 2020, which will provide support to earnings. This suggests that its management has already taken action to start making positive returns for shareholders in the new financial year.
Graincorp trades on a price to book ratio of just 1.1x. This is a very low figure and suggests that the business is being valued close to its conservative accounting value. In the present market with high equity valuations, I see Graincorp as a bargain.
The company does have a debt to equity ratio of 67% so does come with some risks. However, its earnings are usually solid and it should be able to maintain this debt in the long term. The business also carries a substantial amount of cash on its balance sheet as a buffer.
I believe that the problems affecting Graincorp’s earnings are likely to be temporary and the group is taking measures to return to positive earnings. It has manageable risk and has been a solid business until recently. I rate Graincorp as a buy.
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Motley Fool contributor buylowsellhigh5 has no position in any of the stocks mentioned. 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.