One top fund manager says Nufarm Limited (ASX:NUF) shares are totally mispriced

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The Nufarm Limited (ASX:NUF) share price is being slammed again today after jurors in a U.S. civil court awarded $US289 million in damages against Monsanto, saying the company’s Roundup weed killer gave a former school groundskeeper terminal cancer.

The key ingredient in Roundup is glyphosate, which is allegedly what caused the cancer.

Nufarm has previously sold Roundup in Australia and currently sells a Weedmaster product which also contains glyphosate. Investors may be concerned that Nufarm could potentially be hit by legal challenges of its own.

In late Monday afternoon trading, Nufarm shares have fallen $1.07 or 14.2 per cent to $6.47.

This share price fall comes on the back of last month’s profit warning, where Nufarm said the extended dry weather conditions in Australia have negatively impacted the Australian and New Zealand branch of the business.

Writing in its July performance report, the Ellerston Australian Share Fund said that although stock market observers had been expecting a negative earnings impact from the harsh weather conditions in Australia, the magnitude of the impact was much larger than expected.

The fund said this does not change its longer term positive investment thesis on Nufarm, as the Australian business is likely to recover from the poor winter cropping environment over the medium-term as seasonal conditions revert.

Totally mispriced

It went on to say despite its short-term, weather induced earnings pressure, the company is trading on a very attractive multiple of just 6 times FY19 consensus EBITDA, which Ellerston believes is totally mispriced given FY19 consensus EBITDA growth of 37 per cent.

The fund added to its position in Nufarm shares in July, believing the share price pull back more than captures the reduced short-term earnings outlook. It says normally, the best time to buy agricultural stocks is when it hasn’t rained for a prolonged period and everything is seemingly going wrong.

The Ellerston performance report was published before this latest setback for Nufarm.

Nufarm released a statement advising that it does not expect the Monsanto claim will have any impact on its business. Clearly the market thinks differently, or more likely, is not willing to wait around to find out. The stock market hates uncertainty, preferring to shoot first and ask questions later.

Monsanto is expected to appeal the ruling.

Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au