Morningstar | Maintaining Our $125 FVE for Ingredion After Soft 1Q Results; Shares Undervalued. See Updated Analyst Note from 03 May 2019
Ingredion reported a rough start to the year. Higher net corn costs and weather-related issues in North America, combined with strong foreign-exchange headwinds, weighed on first-quarter results. In its earnings release, management lowered the top end of adjusted earnings per share guidance to $6.80-$7.20 from $6.80-$7.50.The market reacted negatively to the guidance cut, sending the shares down nearly 6% on the day. However, we had previously forecast 2019 adjusted EPS to come in below $7.00, which is the new guidance midpoint. With our outlook largely unchanged, we maintain our $125 fair value estimate for narrow-moat Ingredion.
At current prices, we view Ingredion as attractive, with the shares trading in deep 4-star territory. Although the company has faced near-term issues that have weighed on profitability, we are in favor of the recent investments that the company has made to expand its specialty product portfolio. By adding additional textures, natural sweeteners, and protein ingredients, Ingredion's expanded product offerings should allow the company to grow profits in the long term even as demand for corn-based sweeteners continues to decline.
In North America, which generates over 60% of profits, weather-related issues affected transportation and production costs during the first quarter. Results were also affected by higher net corn costs due to lower corn coproduct prices versus 2018. While we have slightly lowered our outlook for the segment in 2019, we expect better second-half results as weather-related issues subside. However, in 2020, as Ingredion begins to ramp up production of its new specialty products, we expect the North America segment to return to profit growth.
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.
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