Mexico-based Gruma S.A.B. (
GMK
,
quote
) reported net sales increased last quarter by 21%, with the
company able to pass on higher commodity costs to consumers and
benefiting from the peso's depreciation.
Revenue growth in the second quarter beat the industry average
and came in at 20.3% over the same period last year. Gruma is a
small-cap producer and distributor of flour, oats, rice and
tortillas in North and South America.
Shares are up almost 38% since the beginning of the year but
the company may have more difficulty increasing prices going
forward to cover yet higher raw material prices. GMK trades at
17.5 times trailing earnings, slightly below the industry average
of 19.5 times trailing earnings.
A strong market getting stronger
Gruma
acquired tortilla production assets
from Albuquerque Tortilla Company last year for $8.8 million,
expanding its reach into the United States and the fast-growing
latino population. Revenue has increased at a 10.5% compound
growth rate over the last five years while operating income has
only increased by 8.0%. This tracks with the company's problem
over the last three years to contain costs.
The market for the company's products is expected to continue
showing strong growth, primarily on higher volumes as a rising
standard of living drives higher consumption in Latin America.
The company is also well-positioned to take advantage of strong
demographic trends in the U.S.
Commodity pressures could start to weigh
The company's operating margin, a key measure of cost
efficiency, has trended down over the last few years from 10.7%
in 2009 to 8.5% for fiscal year 2011. Net margins have been more
volatile but were above the near-term average in 2011 at 10%.
Annual inflation in Mexico registered its fastest pace in more
than two years in July on an increase in eggs and produce.
Consumer prices rose 4.42% on an annualized basis last month,
above the 4.34% for June and well above the central bank's target
range of 2% to 4%. Egg prices were influenced by an outbreak of
avian flu in parts of Western Mexico while other agricultural
prices have been affected by severe weather conditions in the
United States.
Prices for key inputs like wheat and corn have surged this
year as the most severe drought in decades hit U.S. producers.
Prices for corn have jumped more than 63% since mid-June and will
most likely affect the company's margins in the third
quarter.
Gruma holds a BB- rating from Standard & Poor's with a
positive outlook. S&P defines the rating as less vulnerable
in the near-term but facing major ongoing uncertainties to
adverse business, financial and economic conditions.
