Is Orica a damp squib?
Recommendation
That's hardly a surprise though. The company's not only a vast, sprawling enterprise, taking in industrial and agricultural chemicals, explosives and - until last month - plastics, it also suffers from many of the problems that National Foods does (reviewed on page 12).
Most of its businesses are very cyclical and held hostage to external factors over which it has little or no control. That said, the tide of negative sentiment that has been swamping the stock might just have turned for the better. Since our last review in issue 49 (Accumulate - $6.01) the share price is up 13%.
Plastics sold
No one is more aware of these problems than Orica's management and the recent divestment of the last of the company's plastics businesses is a good example of this. On the explosives side, Orica USA - a wholly owned subsidiary - plans to enter a 50/50 joint venture with Nelson Brothers Inc, of Birmingham, Alabama, to focus on the mining industry in the eastern states of the US. It looks like a good deal for both parties, combining Orica's technological strengths and Nelson's strong market presence. Orica is the world's biggest explosives manufacturer and the US is the world's biggest explosives market, so the deal makes a lot of sense.
It was almost inevitable that a respected old industrial company with a falling share price should start babbling about e-commerce and - surprise, surprise - Orica is doing just that. Last month MD Philip Weickhardt announced that the company was changing into a 'new-economy company' to 'actively look at e-commerce and internet opportunities that may generate profits in their own right'.
Apart from the obvious opportunism of this waffle, there are some business-to-business (B2B) options which could make sense for Orica notably in the realm of trading software tailored for chemical buyers. That said, it does seem very late in the day to start talking about B2B opportunities - a concept that has been in gestation for years. Perhaps tellingly, Phil himself has just sold down his options in the company from 682,500 to 595,000 (he owns only a little over 30,000 shares) - hardly a vote of confidence.
Despite this, the growing number of people that are taking a second look at Orica has helped to push the share price up. In the near term the stock could find it difficult pushing higher, but looking further ahead we think there is still plenty of upside. So, don't chase the share price and ACCUMULATE on weaker days closer to $6.45.