Should You Buy Incitec Pivot Limited Shares Today?

What Happened to the IPL Share Price?

Incitec Pivot Limited [ASX:IPL] was mostly flat for the day. By the time the clock hit 2:00pm, the stock was still trading at the same price as the previous close, $4.01 a share. The Aussie market was rather flat as well but managed to produce some marginal gains. The monetary-induced rally in the previous two days has been reversed. Traders are bringing the market back to its fundamentals — slow recovery, slower emerging markets, Eurozone risks, depressed energies and a whole lot of money in the system.

Why Did This Happen to IPL Shares?

If there is anything investors should learn from decades of investment research is that corporate earnings are what drive the market at the end of the day. It doesn’t matter how low the Federal Reserve or the Reserve Bank of Australia are going to keep rates, if it does not translate into real economic income, the market will ultimately fall back on itself.
Did I mention Japan? That is the perfect example of how real deflation can translate into financial asset deflation. So, should investors believe the current levels in the equity market are real? One thing is for sure, a lot of that has been momentum, just like the Aussie fertilizer and explosives maker, Incitec Pivot.
One look at Incitec’s stock price and you would understand. The stock has been playing catch up in the last three months. It embarked on a strong rally during this period and produced roughly a 40% gain.
All its good fortunes began from the end of last year. Before that, the stock wasn’t doing much good for investors. Over a five year period, it underperformed the ASX. That’s WITH the incredible rally in the last few months.

What Now for IPL?

There is no getting around it. The company is a fertilizer company, and that means it is at the mercy of soft commodity prices. What investors should keep in mind is that commodity prices largely move together. This means prices have been in deflation and have not helped IPL.
For investors of Incitec Pivot, two thirds of the company’s revenue comes from its explosive business. Needless to say, that is likely to suffer from weak mining activities. However, there are supportive factors for the company, including a weak Australian dollar and the company’s ammonia project in the US. These will structurally help the company’s earnings in the future.
It was a nice rally while it lasted. What investors need to do now is to be cautious about companies such as IPL. Most market analysts have an ‘underperform’ to ‘hold’ rating on the stock. That is adequate.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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