MDLZ - Grupo Bimbo: World's Leading Baking Player Worth A Look

2023-05-09 03:01:02 ET

Summary

• The world's top bakery player Grupo Bimbo is growing at a rapid pace through acquisitions as well as organic efforts.
• Near-term prospects are promising as receding inflation eases margin pressures as well as market share erosion to private labels.
• Although the bakery market is quite mature in developed markets, Grupo Bimbo is positioned to benefit from opportunities in segments such as specialty bread.
• Positioned to benefit from growth opportunities in Asia where consumer appetites for bakery products are growing.

Mexican bakery goods giant Grupo Bimbo, S.A.B. de C.V. ( OTCPK:GRBMF ) ( OTCPK:BMBOY ), the world's biggest bakery player, is growing at a rapid pace and prospects are optimistic.

Solid performance in Q1 2023

Grupo Bimbo reported a 9.9% YoY increase in net sales to Mexican peso 99.57 billion for Q1 2023, while net profits were down 9.4% YoY to peso 4 billion driven by the sale of its confectionery business Ricolino to Mondelez ( MDLZ ) last year and higher benefits from its pension plan in Q1 2022. Excluding these effects however, Bimbo's profits were up 42% YoY. Input cost inflation however crimped gross margins which dropped to 51.8% in Q1 2023 from 51.3% in Q1 2022.

Near term, prospects are positive; inflation is receding around the world (the IMF expects inflation to drop to 6.6% in 2023 and 4.3% in 2024. Cooling inflation may encourage greater out-ho-home consumption but it would also not only help ease margin pressure for Bimbo near term, but could also limit market share erosion to private label brands. Meanwhile remote and hybrid working trends should continue driving demand for breakfast breads, buns, and muffins to be consumed at home. Grupo Bimbo expects mid-to-high single digit sales growth for FY 2023 and margin pressures are expected to ease in the second half of 2023 .

Medium term, there are reasons to be optimistic about Grupo Bimbo's prospects.

North America's bread market: pursuing organic growth in specialty bread segments, pursuing inorganic growth through acquisitions

North America is Bimbo's biggest market accounting for nearly 51% of Grupo Bimbo's revenues. The segment performed well in Q1 2023 with net sales in US dollar terms up 15.3% mainly driven by the impact of past price hikes flowing through.

Several factors could support Grupo Bimbo's North America performance going forward. North America's bread market is a mature one and the market is expected to grow in the low single digits in the coming years, but niche bread segments such as artisan breads and premium bread products offer growth opportunities. Grupo Bimbo noted that North American premium breads and snacks outperformed Q1 2023.

As America's market leader with a market share of 31% of the country's baked goods market, Grupo Bimbo is well placed to exploit growth opportunities with the company having competitive advantages from scale economies, unrivaled distribution networks and hefty marketing budgets.

Grupo Bimbo already has a broad product portfolio catering to a wide demographic from mass brands such as Sara Lee bread products to specialty breads and premium brands including Oroweat, Arnold, and Organic and non-keto bread Brownberry. Bimbo's diverse portfolio also includes brands such as Marinela, and Tia Rosa (a leading tortilla brand in Mexico) that are targeted at America's Latino (notably Mexican) demographic, benefiting from the growth in their population in the U.S; Latinos have been the biggest contributor to America's population growth over the past two decades, and their numbers are expected to continue rising over the next few decades and account for more than a quarter of America's population by 2060 from about a fifth currently.

Bimbo continues to expand their portfolio, actively launching new products to keep pace with evolving consumer preferences; notable product launches include multi-grain breads, organic breads, and innovative products such as bread with veggies launched under Bimbo's Sara Lee brand.

In addition to organic growth efforts, acquisitions have long been a key pillar in Bimbo's growth strategy and the company has been acquisitive lately acquiring Natural Bakery in Canada this year to strengthen their presence in specialty rye breads in North America. Company management has stated that they continue to hunt for acquisition targets.

Mexico - opportunities to expand distribution

Mexico, Grupo Bimbo's second biggest market, saw net sales rise 19.8% YoY in Q1 2023 driven by a favorable price/product mix performance. Mexico's bread and bakery products market is forecast to grow in the low-mid single digits and Bimbo, as a leading player with a market share of 15.5% and an extensive portfolio of baked goods including bread, cakes, cookies, and pastries should be a beneficiary. Bimbo management noted that the company still has opportunities to expand distribution penetration in the country.

Other markets - pursuing opportunities in Europe and Asia

Grupo Bimbo's EAA market (Europe, Asia, Africa) is its third biggest but offers tremendous growth potential. The company is currently active in a few countries notably Spain, Portugal, and the United Kingdom in Europe, and in India and China in Asia. Revenues were up 12.9% in peso terms, but up 31.2% excluding the impact of foreign currency.

Europe is a mature market for bread and baked goods, with growth expected in the low-mid single digits over the coming years but Bimbo has been making strategic acquisitions to accelerate penetration and market share gains. The company acquired premium bread player St. Pierre to further penetrate the premium bread segment in the United Kingdom, and in Romania, Bimbo scooped up Vel Pitar, a leading player in Romania with a market share of 10% .

Asia offers compelling growth opportunities in the bakery goods space; unlike in the West, bread and other Western-style bakery products are not as widely consumed in Asia. The per capita consumption of bread and baked products is around 57 kilograms per capita in Europe, and 40 kilograms per capita in the U.S., compared with 7.2 kilograms per person in China, and less than 5 kilograms per person in India according to available data.

Consumer tastes are changing however. India's rapidly growing middle class is developing a large appetite for bakery products with India's bakery market expected to grow more than 10% over the coming years, a massive opportunity in the country poised to emerge as the world's third biggest economy. Bimbo stepped foot on Indian soil in 2017, with the acquisition of Harvest Gold that year, followed by the acquisitions of Modern Foods and Kitty Bread in 2021 .

In China, rising incomes and increasingly Westernized diets is driving the country's bread and bakery market which is forecast to grow in the mid single digits. Having entered the market in 2006 , Bimbo is the second-largest player in the packaged bread category according to Euromonitor. The company's portfolio includes breads, cakes, buns, and baked treats inspired by locally popular flavors such as matcha. With the company's markets primarily centered around China's prosperous east coast in cities such as Beijing, Tianjin, Hebei, Shanghai and surrounding areas, there is tremendous room for further expansion in the country.

Risks

Currency risks and low trading volume

Investing in international stocks carry currency risks. In addition, Bimbo's U.S.-traded stocks have very low trading volumes.

Conclusion

Analysts are mostly neutral on the stock.

With a TTM P/E of 14.8 , Grupo Bimbo is cheap compared to rival Flowers Foods (TTM P/E 26.58) despite the former demonstrating relatively better performance compared to the latter and having considerable competitive advantages in terms of scale (Grupo Bimbo is more than four times larger than Flowers Foods in terms of revenues).

Some may view Bimbo as hold, while others, considering Bimbo's optimistic prospects as the world's top player in the baking space with room for further growth may consider it a buy.

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