Thursday, January 11, 2018

Gruma Looks Like A Simple, Undervalued Story With Multiple Levers

Gruma (OTC:GPAGF)(GRUMSAB.MX) hasn’t been an especially rewarding stock for investors in recent years, as the shares have traded within a somewhat narrow band over the past two and a half years. Despite that lackluster recent history, I believe shareholders could see better returns in the coming years as the company leverages improving growth prospects in markets like the U.S. and Europe and drives simultaneous margin improvement. In the shorter term, Gruma should also benefit from lower input costs, new plants scaling up, U.S. tax reform, and a potentially weaker Mexican peso.

I’m looking for mid-single-digit long-term revenue growth from Gruma, as the company continues to expand its branded products business in the U.S. and leverages underlying volume growth, while also seeing more market expansion in Mexico. My FCF growth expectations are considerably more ambitious, but driven by my expectation that Gruma will pass through some “breakpoints” where FCF generation should scale up quickly. All told, I believe Gruma shares are about 20% undervalued today.

Investors should note that since Gruma canceled its ADR program, the ADRs are not very liquid. That is a drawback (and a risk factor) to the investment thesis, though investors can consider the option of buying the local shares (most brokers that offer international trading include Mexico in their offerings).

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Gruma Looks Like A Simple, Undervalued Story With Multiple Levers

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