March 20, 2015 - 2:07pm EST by
2015 2016
Price: 79.85 EPS 5.65 6.15
Shares Out. (in M): 72 P/E 14 13
Market Cap (in $M): 5,700 P/FCF 11.7 11.1
Net Debt (in $M): 1,200 EBIT 643 700
TEV (in $M): 6,900 TEV/EBIT 10.7 9.9

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  • Food Ingredients
  • Commodity exposure
  • Manufacturer
  • Oligopoly
  • High Barriers to Entry, Moat
  • Agriculture


At the current price ($79/shr), Ingredion (ticker = INGR) presents the opportunity to buy an above average company at a below average price. We believe that properly valued, Ingredion is worth well north of $100/share.


What do they do?

Ingredion is a leading producer of specialty starch ingredients used in the food industry.

Ingredion takes corn as its primary feedstock and then through the process of wetmilling, separates the components and produces a "starch slurry." The slurry is than diverted into various finishing lines where it can be converted into a number of vital products.

On the low end of the value chain, Ingredion converts the slurry into high-fructose corn syrup (hfcs) as well as other basic starch products.

On the high end of the value chain, Ingredion converts the slurry into value-added speciatly ingredients which are cost-effective, functional, and critical components in wide range of products.

The specialty starches add critical features to food -- they add texture, mouth feel, stability, and a host of other properties. The starches allow food manufacturers to remove unwanted fat and other components while still maintaing attractive taste and texture profiles.


Industry Structure and Barriers to Entry


The corn-based starch industry is well structured.

In N. America, there are 4 primary industry players: ADM, Cargill, Ingredion, and Tate & Lyle. And in total, there are approximately ~20 large-scale wet mills divided between them.

ADM and Cargill are primarily focused on the bulk/commodity segment of the market -- with a focus on hfcs and related products. These products are sold in LARGE and CONTINUOUS quantities to companies like Coke and Pepsi.

The specialty segment of the market is primarily served by Ingredion and Tate & Lyle. It is predominantly a duopoloy.

The barriers to entry are high because the capital cost of building a wet mill is prohibitive. Additionally, in order to be profitable, a wet mill has to run at fairly high capacity (~80%+). In order to run a wetmill profitably, you need a steady base-load of "core/bulk" hfcs and other starch products. Given the continued decline in soda consumption in the US, it would be next to impossible to "steal" the volume away from encumbants required to achieve operating scale.

So the market structure is quite stable given the industry dynamics.

And despite the steady drumbeat of lower hfcs consumption, the industry has been very good about managing capacity. For example -- Cargill announced last year that it was taking capacity out at one of its existing wetmills. This will serve to maintain healthy utilization levels in the industry.

What is Not Understood?

Bears point to the steady decline of hfcs a reason to avoid Ingredion. This misses the critical point that the starch slurry is an incredibly versatile feedstock. As demand for hfcs gradually declines, Ingredion (and Tate & Lyle) continue to shift their production FROM bulk/core starch products (including hfcs) TO the value-added speciatly starch ingredients mentioned above.

The price per unit as well as the margins are MUCH MUCH higher on speciatly products than they are on bulk products -- so the result is that over time, as Ingredion shifts more and more of its production to specialty ingredients, the business quality actually IMPROVES because the mix is steadily getting better.

The Math

Underlying demand should grow in the low to mid single digits percent. That, combined,w/ the incremental margins from the speciatly ingredients, as well as from operating leverage, should allow Ingredion to grow operating earnings in the mid to high single digits organically.

For 2015, Ingredion has guided to around $5.65 (midpoint) of EPS. In addition, D&A is around $200m but maintenance capex is closer to $125m. Capex spent above this is used to expand production of its value-added specialty ingredients which bring higher earnings with it.

$200m D&A - $125m mtc capex = $75m "excess" D&A --> on 72m s/o = ~$1/shr excess.

$5.65 EPS + $1/shr excess D&A gets us to $6.65.

Add to this number the benefits from its recently closed acquisition of Penford -- and we believe the run-rate is closer to $7/shr on p-forma basis.

Additionally, Ingredion has both an excellent balance sheet as well as an excellent management team.

And incremental returns on capital are quite high (20% +).

A business with these qualities (stable industry structure with high barriers to entry, healthy organic demand growth, improving mix, well managed, conservatively captilized) deserves a multiple in the 14x - 16x range which brings us to a target price of $98 to $112 on one-year-forward after-tax free cash flow per share.
















I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


increased earnings and cash flows as they report throughout the year.

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