2023-11-02 20:41:41 ET
Summary
- Ingredion’s revenue growth has been mild, with an average rate of +3% during the last decade. Management has lacked the aggression or creativity to improve its expansion potential.
- The company’s recent performance appears strong, although is masked by inelastic price increases. The ability to successfully implement this is subsiding, contributing to a slowdown.
- It has seen margin erosion, which, due to competition, will mean pain as it seeks to return to its FY16-FY18 levels.
- Ingredion’s performance relative to its peers is underwhelming, owing to weak growth (appreciating it does have good margins). We struggle to see the commercial development necessary to sufficiently close this gap.
- The company's stock may be slightly undervalued, although we do not see enough justification to suggest Ingredion is attractively priced.
Investment thesis
Our current investment thesis is:
- Ingredion is an uncompelling business in our view and consider this the reason for its mediocre share price performance. Growth has been low and we see no reason for improvement, with a similar case for margins. The business has a market-leading position that is defensible but development beyond this appears soft.
- Although the company may appear nicely priced, there are near-term issues associated with slowing quarterly results as pricing power subsides. We believe it would be important to see how Ingredion’s trajectory develops in the next 1-3 quarters before making an investment decision.
Company description
Ingredion ( INGR ) is a leading global ingredient solutions provider serving customers in more than 120 countries. The company transforms raw materials such as corn, tapioca, and potatoes into ingredients for the food, beverage, brewing, and pharmaceutical industries. Ingredion's products include sweeteners, starches, nutrition ingredients, and biomaterials.
Share price
Ingredion’s share price has performed mildly during the last decade, returning over 70% at a time when the wider market has almost doubled its level. This is a reflection of its modest financial development and reasonable
Financial analysis
Presented above are Ingredion's financial results.
Revenue & Commercial Factors
Business Model
Ingredion offers a vast array of ingredient solutions, including starches, sweeteners, nutrition ingredients, and biomaterials. Its diverse product range and nature caters to diverse sectors such as food, beverage, brewing, pharmaceuticals, and personal care, while ensuring resilient demand.
Ingredion operates in over 120 countries, a presence it has developed through strong brands and a track record of quality products, as well as the scale to support the market. Its widespread presence allows it to tap into various markets and leverage economies of scale.
Ingredion strategically acquires companies and forms partnerships to enhance its product portfolio and expand its market reach. As an example, the company acquired PureCircle in order to expand its exposure to the sweeteners segment, which is growing well as new products are consistently launched. Following the issues with Aspartame, we could see tailwinds for Stevia.
The food industry is slow-moving and lacking any real catalysts. The primary growth engine will always be population growth alongside rising income. This said, we believe the following can have secondary influences:
- Health and Wellness Trends - The growing focus on health-conscious lifestyles in the West, accelerated by the pandemic, has increased the demand for natural and functional ingredients as consumers seek to cook more.
- Global Food Industry Growth - The expanding food and beverage industry, principally in emerging markets, has driven the demand for Ingredion’s products as Western brands and locals expand operations.
- Rising Demand for Plant-Based Products - The surge in vegetarianism and veganism has created a market for plant-based alternatives, even with individuals who are seeking healthier alternatives. Ingredion supplies ingredients used in plant-based dairy, meat, and beverage products, capitalizing on this trend.
- E-commerce Expansion - The rise of e-commerce platforms as part of the supply chain to facilitate global distribution has been met positively across many sectors. It has allowed for greater reach, particularly in the small and medium-sized businesses cohort.
Margins
Ingredion has experienced margin volatility during the last decade, with an initial period of improvement (into FY16) followed by a decline into FY22. This is a reflection of poor operational development in our view. The company has improved its scale and production capabilities, yet has been unable to translate this to financial improvement. Further, the company has seen acquisitions dilute its margins, implying the growth achieved in particular periods is far less impressive.
Given the near-term macro pressures the company is facing ( which is discussed next ), we suspect a degree of immediate margin improvement is possible, although are hesitant to suggest it can revert to its FY15-FY18 levels.
Quarterly results
Ingredion’s near-term performance has been strong, although appears to be slowing. Its top-line revenue growth in its last four quarters was +14.7%, +13.2%, +12.9%, and +1.2%. In conjunction with this, margins have improved, although appreciating this is from a decade-low level.
The company’s financial performance is currently being materially impacted by the macroeconomic environment. With elevated interest rates and inflation, consumers are experiencing soaring living costs, contributing to trading-down of products purchased and reducing spending in other areas. This has impacted the demand for foods, although we note Ingredion is positioned well to offset the impact due to its products being inelastic in demand. Consumers are not going to stop eating and the inflationary impact on low-cost products is far less impactful than say large-ticket/discretionary items. This is the primary reason why Ingredion has been disrupted negatively while still maintaining positive growth. Thus far, the company has been able to sufficiently increase prices without seeing an offsetting decline in volume, illustrating this.
The biggest negative impact on Ingredion has been on the supply side. Inflationary pressures have wreaked havoc on its cost base, with freight/transportation and input costs, in particular, soaring.
Looking ahead, we suspect a “flip” may occur, with margins now improving and revenue flatlining (worse case, declining). Macroeconomic conditions seemingly worsening, likely due to the compounding difficult conditions we have experienced during the last 18 months. This is combined with a rapidly slowing ability to increase prices as volume is being too negatively impacted. This will likely mean the end of price-driven growth. Offsetting this, however, is subsiding supply-side issues as inflation normalizes lower and lower, allowing for margin improvement. On a net basis, the company is likely better placed for an economic recovery but faces more risk of an economic downturn.
Key takeaways from its most recent quarter are:
- The specialty products segment is performing well with DD growth across many sub-categories.
- Management is seeing margin improvement through its value-based pricing, further suggesting growing interest in this segment.
- Ingredion is seeing softer inflationary pressures alongside productivity initiatives and tighter production scheduling. The focus has switched to cost discipline.
- Pricing drove a 14.5% increase in sales while volume negated this by (11.0)%. The closing delta between these two is what we have highlighted as a major concern, particularly as the company has positive FX losses ((3)%), also.
- The sales underperformance is being felt in South America and APAC, where net sales change is negative. EMEA experienced a substantial price-mix uplift of +30% ((15)% down on volume), which represents a near-term risk as this is not sustainable.
- Finally, Ingredion is seeing inventory shipped levels declining, as demand levels begin to soften relative to the post-pandemic period.
Balance sheet & Cash Flows
Ingredion’s FCF has materially declined in the last 2 years, following a period of extreme consistency. This is due to a degradation in inventory turnover, as well as an unusually aggressive inventory build-up. This is usually a one-period issue, as once Management sees that demand is lacking, they rapidly unwind stock. This is not the case and as mentioned above, shipping volume is falling. This potentially means FCF pain will continue, a bizarre fact for such a large, established business.
Management has allocated capital well, although execution is less commendable. The company has a ND/EBITDA ratio of 1.9x, representing a manageable level that provides the flexibility to raise further if required while maximizing its levered investment.
Said capital has been invested in M&A and returned to shareholders through consistently growing dividends (+6%) and periodic buybacks. We like this as a strategy for FMCGs businesses, so long as the acquisitions are accretive. As the following shows, this has not always been the case. Ingredion’s ROE has declined from its prior heights, although not materially so. This is due to some margin erosion following acquisitions, although this suggests there is some compensation in consolidation paid.
We do not consider it in a bad position. A ROE of ~18% currently is impressive (~13% excl. BBs), although we would like to see a renewed focus on margin improvement and only acquisitions that are accretive.
Outlook
Presented above is Wall Street's consensus view on the coming years.
Analysts are forecasting a continuation of its mild growth in the coming years, with a CAGR of +2% into FY27F. In conjunction with this, margins are expected to slightly improve.
These assumptions appear reasonable. The company has good exposure to growth trends through its Stevia offering but beyond this (which is a smaller weighting within the business), its organic trajectory appears low.
Industry analysis
Presented above is a comparison of Ingredion's growth and profitability to the average of its industry, as defined by Seeking Alpha (6 companies).
Ingredion performs moderately well relative to its peers but does not clearly stand out. The company’s growth has been poor, partially due to its less aggressive M&A approach, but also its lower organic trajectory.
Margins are the company’s strength, although it is lacking on a NIM basis and is only slightly ahead on ROE. Nevertheless, given the maturity of the industry, this is the key value driver.
For this reason, we consider Ingredion attractive relative to its peers but there is a concern with the size of the revenue delta.
Valuation
Ingredion is currently trading at 8x LTM EBITDA and 7x NTM EBITDA. This is a discount to its historical average.
A discount to its historical average is warranted in our view, owing to the company’s margin erosion, unattractive growth, and near-term headwinds. At a ~19% discount on an EBITDA basis, we consider the stock appropriately valued.
Further, Ingredion is trading at a ~52% discount to its peers on an LTM EBITDA basis but a ~6% premium on a NTM P/E basis. This appears unusual, owing to the company’s clean below-EBITDA expenses, unlike many in the market. The company’s uninspired financial performance relative to its peers implies a discount is warranted, although do not believe the ~53% is warranted.
Based on this, Ingredion is likely slightly undervalued, although not materially slow. We believe this is reiterated by its NTM FCF yield, which is slightly above its historical average.
Key risks with our thesis
The risks to our current thesis are:
- [Upside] Product innovation in growth areas.
- [Upside] Strategic acquisitions to consolidate market position.
- [Downside] Market saturation in the sweeteners segment.
- [Downside] Negative regulatory changes in the sweeteners segment.
Final thoughts
Ingredion is a solid business but is the definition of underwhelming. Growth has been mild and Management has seemingly accepted this fact rather than seeking to expand the company’s offering, or at least has failed.
We expect a continuation of its existing trajectory, although the risk of near-term issues remains heightened as pricing power subsides. We suggest investors interested in Ingredion remain patient and consider the coming quarters.
For further details see:
Ingredion: Uninteresting Financials Make An Uncompelling Investment Case