Milling & Baking News - January 2, 2018 - 24

Stock Market Analysis

said. "That keeps us somewhat grounded with our forward expectations."
While recommending a handful of companies, Mr. Hundley maintains a
fairly sober view of prospects for the packaged foods sector overall and
instead sees promise in companies focused on value-added ingredients.
He said, "For food companies to regain revenue growth profiles they
want either 1) they will need to become more amenable to a lower margin profile, or 2) they will become even more leaner and take out incrementally more in the way of cost in order to try to maintain margin structure while still generating revenue growth. It's really a tale of two stories
between packaged foods and ingredients. Packaged foods revenues are
under pressure. They are fighting like crazy to maintain margins, and their
leverage profiles have worsened. A large part of that is expensive dealmaking. They're trying to gain greater scale through M.&A., and that
M.&A. is proving expensive.
"Ingredient companies are still seeing very good revenue growth. Balance sheets are in great shape. They have to work to maintain the margin
structures, but thus far they are in much better shape than their packaged foods customers further downstream. The ingredient space is vast,
depending how you define it. We typically look at the specialty ingredients market, which would be ingredients that aren't as commoditized."
Mr. Hundley said Vertical estimates annual global sales of specialty
ingredient total about $75 billion annually.
He noted that companies such as Ingredion Inc., Westchester, Ill., and
Tate & Lyle P.L.C., London, have taken steps in recent years to tilt their
ingredient portfolios more heavily toward specialty ingredients. A major
step in that direction for Ingredion was the company's (formerly known
as Corn Products International) $1.3 billion acquisition of National
Starch in 2010.
"They have continued to pursue that specialty mix, with the acquisitions of Penford Corp. (in 2014) and Kerr Concentrates (in 2015)," Mr.
Hundley said. "I think the pursuit has helped their valuation to a degree,
but it still lags the peers. We see a group today that trades at almost 25
times forward e.p.s. and almost 16 times forward EBITDA. A really expensive group but warranted in our view because revenues are growing,
margins are relatively stable and balance sheets are strong. Plus there is

a lot of consolidation potential ahead. It is a fragmented group."
Ingredion and Tate & Lyle also have benefited from improved market
conditions in the companies' more commoditized ingredient businesses.
"When Cargill closed its Memphis plant, that greatly reduced supply
of commoditized sweeteners and starches and swung the pendulum in
favor of the U.S. corn wet milling industry," he said. "It has seen robust
margins on more commoditized ingredients in sweeteners and starches."
At the same time, Mr. Hundley expressed concern over the highly fragile state of negotiations over NAFTA. Noting the significant level of U.S.
high-fructose corn syrup (HFCS) shipments to Mexico, he warned that
an interruption of that trade could have significant effects on the U.S.
sweetener supply/demand situation.
He said his concerns were mollified by November presentations by
Ingredion executives during an investor day presentation.
"First of all, Ingredion is not as commoditized as we originally thought
in the United States," he said. "Second, there has been talk out of Mexico
that if NAFTA does dissolve, that Mexico may not react as strongly on
U.S. HFCS as had once been thought. Mexico not only needs U.S. corn, but
also needs U.S. corn sweetener. It also relies heavily on the U.S. for own
sugar exports. So, the end result is it doesn't want to get into a trade spat
on cross-border trade related to sweeteners.
"We see very supportive fundamentals for specialty sweeteners and
starches going forward. We expect growth at mid-single digit rate or
higher going forward. The main support for that is changing formulations
with packaged foods and beverages industries. As the companies change
formulations away from synthetic ingredients toward natural ingredients,
formulations become upended, and stabilizing ingredients are required
in order to bring flavor and texture profiles back to the original product
state. Specialty sweeteners and starches are prime remedy for the challenges, important for the move toward natural."
Other companies Vertical rates favorably are Sensient Technology
Corp., Milwaukee, and Innophos Holdings, Inc., Cranbury, N.J. The attraction of Sensient is the combination of both colors and flavors in its
product portfolio, Mr. Hundley said. He said valuation make Innophos
attractive. MBN

Grain-based foods share price charts
Seaboard Corp.

Post Holdings, Inc.
per share

$94

$5,000

2017

$83

$155

per share

2016
$140

$4,000

$72
$61

J.M. Smucker Co.

per share

$125
$3,000

2016

$50
Jan. March May July Sept. Nov.

$2,000
Jan. March May July Sept. Nov.

Snyder's-Lance, Inc.
$52

$65
2017

$38
$31
2016
$24
Jan. March May July Sept. Nov.
Milling & Baking News

2017
$95
Jan. March May July Sept. Nov.

TreeHouse Foods

Starbucks Corp.

per share

$45

24 / January 2, 2018

$110

2016

$61

per share

2017

$118

per share

2016
$98

$57

$78

$53

$58

2016
$49
Jan. March May July Sept. Nov.

2017
$38
Jan. March May July Sept. Nov.
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - January 2, 2018

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