Shares of Ingredion Incorporated (NYSE:INGR) have recently seen momentum, having regained triple-digit territory again, as investors are turning a bit more upbeat after a few tough years.
It has been a long way back since I last looked at the shares of Ingredion. In fact, it was early 2018 when I concluded that Ingredient offered growth at a reasonable price.
That conclusion, unfortunately, was a bit too upbeat, as investors have not seen any net returns over the past five years, although I see continued appeal amidst low earnings multiples. That being said, I fail to have conviction to double down on my position given my experience over the past five years.
A Recap
Ingredion offers products which can be found in everyday food and other products, being an attractive market to operate within with solid margins and stable growth. This steady business with a rosy long-term outlook made shares look reasonably priced amidst modest leverage and a reasonable valuation as I held a position around the $130 mark at the time.
Ingredion at the time offered over 1,000 ingredients which are categorized as starches, sweeteners, fruits and vegetable products, and others. The company was largely a North American business, complemented by operations in Europe, Asia-Pacific, and South America.
The company operated in a huge $150 billion global ingredients market with these ingredients being key to improve convenience, create easier recipes, improve taste, and provide a better experience, with many ingredients being rather low in terms of their costs.
Back in 2017, Ingredion was a $5.8 billion business, with revenues up 2% on the year before on the back of pricing. Operating earnings came in at over 13% of sales, with net earnings of $419 million working down to earnings of $7 per share, with adjusted earnings posted in the higher $7 per share range. With earnings seen improving to $8 per share in 2018, and the business posting a mere 1.2 times leverage ratio based on just over a billion in EBITDA, valuations looked quite reasonable.
The company actually outlined 2022 targets which more or less painted a picture in which Ingredion would grow sales to $6.5 billion (ex M&A efforts) with operating margins seen around 15-16% of sales. This could result in earnings per share of around $10 per share, which would result into a valuation in the high $100s, if the company could execute, making me a happy owner of the shares.
A Painful Ride
Forwarding ahead about five years in time, shares have seen dismal returns. Shares fell below the $100 mark in 2019 and have largely traded in the $80-$100 range ever since. Only more recently, shares have come to life as they now trade at $107 per share. Even if we factor in a current 2.6% dividend yield, that leaves small negative returns over this period of time, so Ingredion has been a real laggard.
In terms of sales, the company made some progress as revenues rose to $6.9 billion in 2021 and to $7.9 billion in 2022, entirely driven by inflationary trends. That was about the good news, as operating profits were reported at $762 million, which means that 13% margins in 2017 have fallen to the 10% mark, instead of moving up to the 15% park (as outlined in 2018) as this margin trend is the reason for the underperformance of the shares.
After all, the combination of sales growth and margin compression meant that earnings per share of $7.34 per share were flattish in 2022 (compared to 2017). Moreover, net debt has risen to $2.2 billion over time, all while EBITDA is flattish around the billion mark, pushing leverage ratios to just over 2 times.
The company posted adjusted earnings of $7.45 per share, eleven cents more than the GAAP numbers as the company outlined a guidance in which 2023 earnings were set to increase to $7.70-$8.40 per share. This was driven by the anticipation of sales to be up by mid-double digits, with margin pressure anticipated as adjusted earnings were seen up in the high single digits to low double digits.
A Strong Start To 2023
In May, Ingredion posted a 13% increase in first quarter sales to $2.14 billion, and the $245 million increase in sales was entirely (and some more) due to a $424 million increase in prices and the mix. This was in part offset by a $63 million impact from the strong dollar and a $116 million headwind from lower volumes. The company did see strong operating leverage in this inflationary environment, in which it seems that pricing to end clients is up, outpacing the increase in input costs. This meant that operating margins improved more than two points, to 13.6% of sales here.
This resulted in a spectacular increase in first quarter earnings, with earnings per share up by 48% to $2.85 per share on a diluted basis, largely in line with adjusted earnings reported. While the company cut the full year sales guidance to effectively a midpoint around 10%, it raised the earnings outlook to a midpoint of $9.05 per share, up a full dollar from the initial outlook for this year. At the same time, net debt ticked up to $2.4 billion.
That said, a $345 million EBITDA number for the first quarter looks strong. Annualized, the $1.4 billion number looks a bit of an overestimate, as the first quarter is seasonally a bit stronger, but leverage ratios should likely come in just below 2 times based on the anticipated EBITDA numbers this year.
And Now?
With earnings trending around $9 per share, it is needless to say that Ingredion Incorporated valuations are not demanding at 12 times earnings, even as leverage has ticked up to two times here. This valuation looks quite enticing amidst reasonable leverage. That being said, there are some caveats as well.
The lower earnings multiple is in part the result of an anticipated dollar per share increase in full year earnings. The question is if the current operating margins can be sustained going forward, or if they revert towards 10% as they have done in recent years. This concern and the continued volume declines, with growth being driven by pricing, make me a bit cautious here despite the low current multiple.
Given this, I am happy to hold onto an Ingredion Incorporated long position which has not paid off over the past five years, and while shares look cheap, I am aware of the underperformance in recent years and will wait before doubling down on the stock here.
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