Ingredion Mixes New Products, Locales To Spur Growth

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What are the ingredients for a winning business model?

Look no further thanIngredion ( INGR ) for the answer. If not Ingredion, where else? The company turns corn and other raw materials into sweeteners, starches and nutrition ingredients for the food, beverage, brewing and pharmaceutical industries.

Over its life, the more-than-100-year-old company has followed a tried-and-true recipe that's helped it buck the head winds in its cyclical industry and chalk up an impressive track record.

Profits have surged by at least double digits in all but two of the past 11 quarters.

"We have a solid business model and know how to create value," said Chief Executive Ilene Gordon in a presentation at its analyst day Nov. 28. "Over the last three years we have met or exceeded our long-term performance targets. Our balanced mix of products, geographies and industries served position us well now and into the future for growth."

Ingredion's business model is based on converting corn into a broad portfolio of value-added products for customers in over 60 industries, says Chief Financial Officer Cheryl Beebe. You can find its ingredients in everything from ice cream, frozen microwave meals, soda and beer, to IV solutions and cosmetics.

Key to the model's success is Ingredion's focus on operating as a local producer, using local management. The approach gives the company a unique understanding of the cultures and product requirements in each market. The regional operations are supported by several global functions, such as operations, IT, procurement and ingredient development centers.

Balanced Markets

Ingredion maintains a 50-50 balance between mature and emerging markets. Some 54% of sales come from North America, 25% are from South America; Europe, the Mideast and Africa account for roughly 9%, and the rest is from the Asia-Pacific region.

"The combination of a number of mature markets and emerging markets gives us favorable organic growth," Beebe said.

Ingredion's growth strategy also includes geographic and product expansion. That came into play with the October 2010 purchase of National Starch, the New Jersey-based global specialty starches business of AkzoNobel N.V. of the Netherlands.

Ingredion, then called Corn Products International, paid $1.3 billion for National Starch, which had 2009 revenue of $1.2 billion from sales of specialty starches to both local and multinational customers in the food, papermaking, consumer and industrial segments. The company's name was changed to Ingredion on June 4.

At the time of the buy, National Starch operated 11 plants in eight countries, including new geographies for the company, such as the United Kingdom, Germany, Australia and New Zealand.

Corn Products had roughly $4 billion in sales in 2010. So it was a substantial buy, says Beebe, adding Ingredion expects 2012 sales to hit $6.5 billion.

The acquisition brought a lot to the table.

It gave the company a greater geographic presence in the Asia-Pacific region, a specialty starch business in Europe and a stronger portfolio in specialty starches, says Beebe.

She calls the buy a "home run" in executing on the company's strategy to grow via product and geographic expansion.

Ingredion completed integrating National Starch into the mix on schedule in the third quarter.

Ingredion is faring well on the financial front.

In the third quarter, earnings rose 27% to $1.52 a share. Sales grew 3% to $1.679 billion.

The third-quarter showing was driven by a combination of strong pricing and volume growth in two regions, North America and Asia-Pacific, says Beebe.

"The most important factor for this business is pricing power," said BB&T Capital Markets analyst Heather Jones.

"Capacity utilization has been tight because demand is strong," she said.

She says volume in North America has been strong, especially in Mexico, which has a growing economy. The strength in North America, she adds, has more than offset the "lion's share" of the weakness in Brazil, where volume has been soft.

Pricing power is particularly important now, a time when the price of corn is high. In August, it traded at a record of near $8.40. It has since eased back to $7.56 on Nov. 28, roughly 36% above its year-ago price.

Beebe says Ingredion's products are a small percentage of its customers' input costs.

"That's why we have the ability to price for the significant increase in the price of corn," she said.

Ingredion follows a policy of hedging its exposure to commodity fluctuations with commodities futures contracts for certain of its North American corn purchases, according to a company filing with the SEC.

Its fixed-price business is hedged to manage the commodity pricing risks during the year. Other businesses may or may not be hedged at any given time based on management's judgment as to the need to fix the costs of its raw materials to protect its profitability.

Earnings Estimates

Analysts polled by Thomson Reuters see full-year earnings growing 18% to $5.53 a share. They see a 6% gain in 2013 and a 7% increase in 2014.

"We expect earnings per share to grow 10% to 12% over the long term, while maintaining a focus on return-on-capital employed," Beebe said in a presentation on its analyst day. "Earnings performance should be driven by a combination of organic sales growth of 3% to 4%, cost efficiencies and mix improvement."

Jones has a buy rating on the stock.

"I like the stock because I believe that their geographic positioning and end-market composition should allow them to generate very solid earnings growth, both near- and long-term, despite challenges," she said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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