Should you sell Elders?

RELATED QUOTES

SymbolPriceChange
AAC.AX1.280.0000
CSS.AX0.054-0.0020
ELD.AX0.1050.0000
GNC.AX8.85-0.040
RHL.AX3.400.000

After the market closed last night, Elders (ELD.AX), an iconic Australian brand that can be seen in country towns across the nation, requested a trading halt. With the half-year report due out today, the company felt it best to halt trading until after the results were released.

The trading halt comes on the same day that the Australian Competition and Consumer Commission (ACCC) announced it would not oppose a merger between Elders and Ruralco (RHL.AX). The market sent the shares higher in the wake of the announcement, which did provide some certainty for investors, however given the dire state of Elders and the rural merchandise sector in general, it would have been unlikely that the ACCC would oppose it. Indeed, part of Elders demise is due to its lack of pricing power, which has led to it running at a loss for years now.

The ACCC announcement and the results release come just a week after Ford Australia announced its cessation of manufacturing in Australia. Futuris, which is the car parts division of Elders, has significant exposure to Ford Australia, with sales to Ford Australia accounting for around 25% of Futuris’ revenue.

The timing of Ford’s announced closure couldn’t have come at a worse time for Elders management as it tries to further the sale of both the Futuris and Elders Rural Services divisions. Shareholders and Elders Hybrids (ELDPA.AX) holders shouldn’t have much longer to wait with bids due in coming weeks.

A lot of the blame for Elders’ current malaise can be placed on previous management, which set the Elders train wreck in motion by expanding into countless non-core businesses with grand plans that ultimately failed. Many other agriculture-exposed companies have also struggled over the past few years, including fish farmer Clean Seas Tuna (CSS.AX) and beef producer Australian Agricultural (AAC.AX) whose share prices are still languishing at multi-year lows. However it hasn’t been all gloom in the agricultural sector with Graincorp (GNC.AX) recently receiving a premium priced takeover offer.

Foolish takeaway

There is a lesson for investors in Elders’ demise. Firstly, for long-term shareholders it is important to reassess your portfolio from time to time. Asking yourself  ‘would I buy this company today and if not, why not?’ is a great way to reassess and  force yourself to take a good, hard, honest and critical look at a company and whether it should be in your portfolio or not. Secondly, for contrarian shareholders in Elders who caught a falling knife, it’s important to never forget one of Warren Buffett’s great lines “turnarounds rarely turn!”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.

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