BUY HOLD SELL – Elders (ASX: ELD)

Elders (ELD) plummeted on the release of results on November 14 (Monday). Down 22.9% on the day of the release. Henry bought it as a trade feeling the sell-off was overdone in the short term.

Some bullet points:

• Announced the retirement of their long-time CEO next year, who has been a mainstay for the company for over a decade.
• Sales increased 35% to $3.4bn.
• Underlying EBIT increased 23% to $232.1m missing brokers’ forecasts causing the stock price to drop.
• Outlook remained positive with favourable trading conditions expected to continue with high demand in the first half of FY23.
• Short term the recent extreme rainfall across the eastern states has created uncertainty in the affected regions and may not yield a full harvest.
• Strong demand in chemicals and fertiliser is expected to continue.
• Cattle and Sheep prices are expected to soften in the medium term.
• Wool demand remains strong from China and other Asian nations.
• Elders Board Chair has commented that “Australian agriculture is in a strong position. Good seasonal conditions, strong commodity prices, and record demand for Australian agricultural products are all contributing to a very favourable production environment and a sense of confidence and excitement for the years ahead”.

 

BROKER VIEWS

Not a lot of broker coverage. Morgan's note cash flow was well below expectations, it will be hard to meet 2023 earnings growth after such a strong 2022, and the CEO resignation overshadowed the results announcement. Its been a bumper past which they now expect to 'normalise'. Macquarie is more optimistic thinking they can match the 2022 growth with a combination of organic and acquisitive growth saying strong agricultural conditions continue into this year. The full-year numbers beat their expectations up 39%. They forecast $218m this year down from $232m.  

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THE NUMBERS

Elders has strong financials; earnings show positive growth year on year this year but the story is in the numbers - growth reverrts to zero after a very strong year. Rural stocks like ELD are highly seasonal. Whilst they have celebrated a great year, it never lasts 'in the country' in Australia. Dividend growth was strong, and ROE averages approximately 17%. Elders is a strong-value stock with a current PE of 10.6x. The departure of the CEO has clearly shaken the market, but they have given themselves plenty of time to find a suitable replacement, and it is very doubtful that anything will actually change internally.  

PE HISTORY

The Forward PE history is in blue. The 5 year average is 13.3x. It has just dropped to 10.4x. Looks 'cheap'. Lowest PE in years.  

CHART

The sell-off yesterday was seismic and Henry was right - it is technically oversold in the short term having dropped from the top to the bottom of a well established long term trading range.  

Conclusion

To read the conclusion and to get access to more market commentary, sign up for a free trial now and become a better investor.     More about the author – Marcus Padley Marcus Padley is a highly-recognised stockbroker and business media personality. He founded Marcus Today Stock Market Newsletter in 1998. The business has built a community of like-minded investors who want to survive and thrive in the stock market. We achieve that through a combination of daily stock market education, ideas and activities.