Report
Seth Goldstein
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Morningstar | Few Surprises in Ingredion's Detailed 3Q Results; We Maintain Our $128 FVE

Ingredion reported detailed third-quarter results with operating income falling over 33% year over year to $155 million, primarily due to foreign exchange and an unplanned outage at the company's largest sweetener plant in North America. Ingredion had reported initial results along with a reduction to 2018 EPS guidance on Oct. 23. With the earnings release providing little new information, we maintain our $128 fair value estimate. Our narrow moat rating is also intact.

At current prices, we continue to view Ingredion as undervalued, trading firmly in 4-star territory. We think investors have overreacted to the company's near-term challenges while disregarding its long-term earnings potential. The firm continues to ramp up its specialty product sales, which command higher prices and generate higher margins.

In the North America segment, operating margins contracted 130 basis points year on year to 15.5% due to the aforementioned plant outage as well as lower capacity utilization from lower sweetener sales. On the earnings call, management said production at the Stockton, California, plant that produces high-fructose corn syrup will shut down by the end of November. As HFCS demand continues to decline, we expect Ingredion to continue taking steps to reduce its reliance on the product, which generated roughly 9% of sales in 2017. Over the long term, we point to increased North America segment sales from specialty starches as a driver of profitable growth.

In the Asia-Pacific segment, higher tapioca prices continued to weigh on results as operating margins contracted roughly 270 basis points year over year to 12.7%. This stemmed from a lag between Ingredion's costs and the price increases passed on to customers. We expect Ingredion will be able to pass along higher prices over the next couple of quarters. During the quarter, the company also announced a plan to invest in increased capacity for its specialty starch products in the region. As specialty sales grow from 44% of Asia-Pacific revenue to over 50% over the next several years, we forecast that the segment will be able to generate operating margins in the high teens.
Underlying
Ingredion Incorporated

Ingredion provides ingredients solutions. The company turns corn, tapioca, potatoes, grains, fruits, and vegetables into ingredients and biomaterials for the food, beverage, brewing and other industries. The company's product lines include starches and sweeteners, animal feed products and edible corn oil. The company's starch-based products include both food-grade and industrial starches, and biomaterials. The company's sweetener products include glucose syrups, maltose syrups, fructose corn syrup, caramel color, dextrose, polyols, maltodextrins, and glucose and syrup solids. The company's products are derived from the processing of corn and other starch-based materials, such as tapioca, potato, and rice.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Seth Goldstein

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