Ingredion (INGR) came to our attention earlier this week when, in our review of our database of 13F filings by hedge funds and other large investors, we found that Fisher Asset Management has a position in the company. Ingredion, formerly known as Corn Products International, manufactures and sells corn-based products including syrup, oil and feed for animals. In mid-July, the stock was down about 10% for 2012, as investors speculated that high corn prices would hurt the company's business; however, strong numbers in its last quarterly report allowed it to recover to a 5% gain on the year.
In the second quarter, net sales were up 3% compared to the second quarter of last year, but net income rose 38% -- from $79 million to $109 million - and its costs barely rose. Coming on the heels of a weak first quarter, Ingredion finished the first half of 2012 with revenue up 5%. Net income was down 13% compared to the same period in the previous year, but excluding a NAFTA related award in 2011 (which compensated the company for a Mexican tax in the early 2000s on products sweetened with high fructose corn syrup), results were about flat. On a geographic basis, its North American operations have been very strong this year, offsetting weakness in the rest of the world. For example, in Europe, the Middle East, and Africa (EMEA), the company's revenue fell 6% and operating income fell 14%. So while the company has been hit by higher corn prices, it has so far been able to pass on many of these rising costs on to its customers.
The market's pricing implies that Ingredion will face a tougher market environment in the future. The company's trailing P/E is 11, and there is a small dividend yield of 1.5%. As long as Ingredion can tread water over the next few years, it will prove to be a value stock. The sell side expects it to have good earnings growth in 2013, resulting in a forward multiple of only 10. There is some commodity price risk, but the company has held up acceptably well as corn prices are relatively high. Since these high prices are partly due to drought conditions in the U.S., we are skeptical that corn prices will be similarly high in future years. Looking out further, the stock's five-year PEG ratio is 1.0. Ingredion will have to disappoint the market in order to not end up a good value.
In addition to Fisher Asset Management's 1.4 million share stake in Ingredion, Jacob Doft's Highline Capital Management initiated a position in the stock during the first quarter of 2012. The fund reduced its position in the second quarter, but still finished June with just over 1 million shares of the company and Bronson Point Partners owned about 620,000 shares at the end of the second quarter.
The closest comp for Ingredion is Archer Daniels Midland (ADM), which has a large corn processing division. With an $18 billion market cap, ADM is considerably larger than Ingredion. It suffered an earnings hit last quarter, reporting 26% lower income than a year earlier. However, analysts expect it will bounce back: Its trailing P/E is 14 but its forward multiple of 9 is slightly lower than Ingredion's. The 2.6% dividend yield is also slightly more attractive.
We are conflicted about how to call this one: If the sell-side is right, then ADM is clearly a better buy, but Ingredion has a better trailing multiple and seems to be doing better in the current pricing environment. Kellogg (K), Kraft Foods (KFT) and General Mills (GIS) are three other peers. Kellogg and General Mills trade at 15x and 17x trailing earnings, respectively, with forward multiples of 14. They aren't as exposed to one particular commodity as Ingredion is, have larger market caps, and pay dividend yields of about 3.5%. However, on a value basis, we think that Ingredion or ADM are better buys. Kraft is even pricier, with a trailing P/E of 21 and a forward P/E of 15. The sell side expects strong growth, but, again, we would opt for Ingredion or Archer Daniels Midland despite their commodity exposure.
(This article was written by Insider Monkey writer Matt Doiron and edited by Meena Krishnamsetty.)