What does IPL do?
Incitec Pivot [ASX:IPL] is engaged in the manufacture, trading and distribution of fertilisers, industrial explosives and chemicals. It is therefore exposed to agricultural, industrial and bulk commodity prices. That means there are quite a few moving parts to IPL’s business.
What’s happening to Incitec Pivot’s share price?
Today, IPL released its half-yearly profit results. The result itself was ordinary, but the market believes that is as bad as it will get for the company. The market believes that now is the time to buy. That sentiment was reflected in the share price, which surged 10%.
As mentioned, the actual result for the six months to 31 March was ordinary. Underlying profit fell around 6.5%, to $137 million, while headline profit was just $30 million, impacted by a $105 million write down of the Gibson Island fertiliser plant near Brisbane.
What now for IPL?
As I mentioned, there are many moving parts to IPL’s business. Commodity prices impact on the demand for its end products. They also represent variable input costs for IPL’s own production.
In addition, having manufacturing operations in the US brings in currency risk too. Because of the difficulty in correctly anticipating all these moving parts, it is especially important in this case to ‘see what the chart is saying’. Combined with the fundamental analysis, this can give you valuable insight into the direction of IPL’s stock price.
Based on today’s share price reaction, it’s clear the market thinks the worst is over for the company. And it does look cheap based on 2017 earnings estimates, as it trades on an attractive P/E ratio of around 10 times.
But the two-year chart below doesn’t look very attractive. Despite today’s rally to around $3.16, the share price is still in a downtrend. I would prefer to see the stock trade above $3.30 before buying. If it breaks the lows around $2.70, it’s a sign that something isn’t quite right with the company. However, given these lows held back in 2014, I don’t expect this to happen.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, The Daily Reckoning