Description

Corn Products International is a corn processor spun out from CPC (Bestfoods) in 1997. The company processes corn primarily into High Fructose Corn Syrup (HFCS) which is used as a sweetener in sweetened beverages (soda, iced tea etc) and sweetened foods. The corn processing also produces byproducts used as feedstock for animals, corn oil and inputs for dog and cat food. 62% of sales are from North America (US, Can & Mex) and 38% are from international which has higher margins due to CPO's more dominant shares in each international market particularly South America where CPO has #1 market share. CPO has been growing its international business through acquisitions and joint ventures and will likely continue to do so going forward due to the greater margins, better growth opportunities (sugar is used more frequently as a sweetener in international mkts-an opportunity for CPO and sweetened beverage mkts underpenetrated relative to US). Trades at a cheap 5.4x 2000 EV/EBITDA,5x 2001 estimate EV/ebitda, 12.5x 2001 eps estimate of 2.00 (some charges in 2000 and a pricing issue-see below) and slightly less than 1.0x Book Value and bought back $40mm of stock last year.

Pre-spinoff this company earned well above $3.00 (3.79 in 95)due to high capacity utilization enabling nice annual price increases. This is a capital intensive business and following these strong price increases new competitors and existing competitors added capacity and tanked pricing leading to a sharp decline in north american pricing and margins. Since 1997, no significant new capacity has come online and pricing has consistently increased other than the 2000 period. Pricing for HFCS is determined in Jan-Feb each year in negotiations between producers and large customers. In 2000 the industry was unable to increase prices due to some irrational behavior from smaller competitors which was followed by the larger players (Cargill, ADM and AE Staley control more than 70% of capacity). In 2001 negotiations led to an approx 8-10% price increase. The smaller players have been disciplined through JV's/marketing agreements with the larger players (including CPO) and again no new large capacity increases are planned. This company is highly leveraged to price increases in HFCS which appear to be on a nice upward trend due to no new capacity increases and steady food and beverage volume increases.

CPO has suffered recently due to currency, high natural gas costs and extremely low byproduct values (corn oil and feed) due to bumper harvests for competitive products around the world and historically low soybean oil pricing. This may continue, but CPO also benefits from lower corn input costs on a going forward basis (they typically fix this price in Feb-March). The real driver here is HFCS pricing and the value of international operations. These guys dominate the international market for these products (which also exposes them to significant currency risk-particularly latin america-brazil and argentina) which are growing at double digit rates due to both strong volume growth (better demographics, lower penetration of sweetened beverages and foods, lower penetration of HFCS vs. sugar) and pricing (less competitive markets). Patient investors should be rewarded as pricing continues its upward trend and the international markets contribute more to sales and operating profits.

Catalyst

HFCS pricing next January should be up again high single digits, volume growth in beverages and sweetened foods is generally pretty stable. Gabelli bumping stake over 6%. Potential acquisition target at cheap valuation. How many companies of this size trade at 1x book (yes ROE is below avg-primarily b/c of pricing) again you must look back at the history of pricing in this industry and the current lack of new supply to see the future. Estimates are that replacement cost for CPO assets is twice current market value. Risks include currency, natural gas (although this market will react to high prices with new supply-already happening), byproduct costing.