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

Seeking Alpha: Premium-Priced Hormel Sells Off On A Less Than Perfect Quarter

To be clear from the outset, I think that Hormel (HRL) is a great company, but I do believe that a truly great stock idea needs a confluence of great company and an attractive price and that hasn't always been available with Hormel. A high price tag hasn't kept other investors away, though, and the shares have done pretty well over the past one and two-year periods (up about 14% and 65%) and have steadily outperformed rivals like Hillshire Brands (HSH) and ConAgra (CAG) while lagging Tyson (TSN).

Hormel remains pretty expensive at nearly 12x forward EBITDA, though the company has done a very good job with Skippy so far and has the financial resources to make other value-creating acquisitions. Close to my fair value on a discounted cash flow basis, I think these shares are definitely worth watching if the disappointment around earnings persists.

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Premium-Priced Hormel Sells Off On A Less Than Perfect Quarter

Investopedia: Waiting For Hormel To Get Cheaper Isn't Getting Any Easier

Once in a while even the best-loved food and beverage companies will sell off on concerns about organic growth trends or margin worries. So far, though, it looks like Hormel (NYSE:HRL) is largely immune, as although margins came up a little light this quarter, the Street seems willing to look past one quarter and remain focused on the attractive, higher-margin business management is building.

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Investopedia: BRF SA Serves Up A Feast For Investors

For reasons completely unknown to me, Investopedia editors chose to change the company name to "BRF SA" instead of Brasil Foods... 

The argument I've made for some time with BRF S.A. (Nasdaq: BRFS) is that this company is on a long-term plan to transform itself from a commodity- and export-driven protein company into a global branded food company like Kraft (Nasdaq:KRFT) or Nestle (Nasdaq:NSRGY). With that, I not only expect significant growth, but significant margin and free cash flow expansion over the next decade. BRF S.A. is by no means cheap according to conventional metrics, but the shares are still slightly undervalued on a cash flow basis and offer investors good exposure to emerging market consumer spending growth.

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Investopedia: ConAgra Does Appear To Be On A Better Path

It's been easy to criticize ConAgra (NYSE:CAG) management over the years, as relatively ham-fisted management of junior varsity brands has led to pretty pathetic growth and margin performance relative to its peers. What's true about the past is not automatically true about the future, though, and I think ConAgra is in perhaps the best shape it has been in the time I've watched the company. There's still a lot of work to be done in improving margins and cash generation, but in an overvalued sector ConAgra looks like an interesting relative value.

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Investopedia: Smucker Does Alright, But The Street Goes Away Disappointed

I liked J.M. Smucker (NYSE:SJM) on a relative basis back in November, and the stock hasn't disappointed since – trading up about 20% and slightly outperforming peers like General Mills (NYSE:GIS), Kellogg (NYSE:K), and Kraft (Nasdaq:KRFT) in the packaged food space. I still like Smucker as a company – management is happy to run a business of relatively small, focused, market-leading brands, and run them pretty profitably. While guidance of a year-on-year decline in free cash flow (FCF) and stagnant sales may have disappointed the Street, this still remains a relatively interesting name in the food space.

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Investopedia: Hormel Transforming, But Valuation Already Ahead Of It

Within the food and beverage sector there are certain stocks that just never get all that cheap, leaving investors with the uncomfortable choice of paying up (and hoping that the growth expectations come through) or waiting for the rare sell-off. In addition to companies like Nestle (OTC:NSRGY) and Coca-Cola (NYSE:KO), Hormel (NYSE:HRL) deserves a place on that list as the company has long combined good growth, improving margins, and strong returns on capital and delivered good stock market returns (more than tripling the return of the S&P 500 since the early 1990's).

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Investopedia: ConAgra Now Getting Almost Full Benefit Of The Doubt

It's been an interesting few months for packaged food companies. Volume trends have looked softer than expected as consumers continue to feel a pinch, but input costs have also eased up. Most significant, though, was the acquisition of Heinz (NYSE:HNZ) by Berkshire Hathaway (NYSE:BRK-A,BRK-B) and 3G and the near-immediate upward revaluation of the sector.

Against that backdrop, ConAgra (NYSE:CAG) continues to be a “yes, but...” company. As in, “yes, the RalCorp deal helps, but the company has to execute on the integration” or “yes, input costs are lower, but the company is having to spend on marketing/promotion to prop up weak volume”. While I liked ConAgra as an undervalued play in the sector back in December, I don't feel as strongly about it today given the significant move in the sector and this stock in particular.

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Seeking Alpha: Brasil Foods Moving From Tyson Towards Nestle

Lack of ambition has never been a problem at Brasil Foods (BRFS). While over a third of the company's revenue currently comes from commodity meat exports to the Mideast, Africa, and Asia, Brasil Foods has made it abundantly clear that they don't see other Brazilian protein companies like Marfrig or JBS as their true long-term peers, nor American protein companies like Tyson (TSN) or Smithfield (SFD). No, Brasil Foods is playing for larger stakes - looking to become the developing world's answer to Nestle (NSRGY.PK), and they may just be ambitious enough to pull it off.

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Brasil Foods Moving From Tyson Towards Nestle

Seeking Alpha: Kraft's Cheese Has Already Been Moved Far Enough

When companies announce major spin-offs or splits, they usually promise that the separation will unlock substantial value for shareholders and allow the two businesses to operate better. While time will tell about that latter part, maybe there was some value created in splitting Mondelez (MDLZ) and Kraft Foods (KRFT). At the current price, Kraft doesn't look like a bargain, nor does Mondelez, as both seem more overvalued apart than they did together. While Kraft Foods has numerous opportunities to improve performance in the coming years, it looks like the Street has already assumed that one way or another those improvements are as good as done.

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Kraft's Cheese Has Already Been Moved Far Enough

Seeking Alpha: Hormel Buys Skippy: Bold Move Forward, Or Future Sticky Mess?

Give credit where due - Hormel (HRL) is not just playing lip-service to the idea of being a more diversified packaged foods player. While many companies talk about wanting to make bold moves, Hormel has shown over and over again that its management team is actually willing to do it. The question, though, is whether the company's $700 million purchase of the Skippy peanut butter brand from Unilever (UL) is a bold move forward for the business, or a step too far outside of its competency.

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Hormel Buys Skippy: Bold Move Forward, Or Future Sticky Mess?

Investopedia: Can Silgan Balance Ongoing Returns Of Capital With Building For The Future?

It's hard to argue that Silgan (Nasdaq:SLGN) doesn't have a very attractive business with pretty significant barriers to entry. Silgan has a better than 50% share in North American can markets, and likewise substantial share in its closures business. What's more, other competitors like Ball (NYSE:BLL), Crown Holdings (NYSE:CCK) and Berry Plastics (NYSE:BERY) tend towards the rational when it comes to pricing. Couple that with a strong emphasis on returning capital to shareholders (with dividends and buybacks), and you have what looks like a strong company.

The question with Silgan, though, is the extent to which it can adapt with the times. As food producers have switched from glass to plastic, I expect the same to happen over time with metal. While Silgan can offset some of that with expansion into emerging markets, I have to ask whether the company also needs to grow beyond metal cans to maintain its long-term earnings power.

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Investopedia: Sanderson Farms Does OK This Quarter, But Long-Term Value May Be Elusive

Protein production is a tough, low-margin business. Like most other tough, low margin businesses, it's also difficult to build real economic moats and create long-term shareholder value. So while Sanderson Farms (Nasdaq:SAFM) deserves credit for a decent quarter during challenging times, investors would likely do well to regard this name as more of a trading opportunity than a long-term core holding.

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Investopedia: Volatile Smithfield Delivers A Good Quarter

As I've written a few times before, when it comes to protein producers such as Tyson (NYSE:TSN), Smithfield (NYSE:SFD) and Pilgrim's Pride (NYSE:PPC), above-average year-to-year and quarter-to-quarter volatility is just the way these businesses are. While Smithfield delivered a surprisingly good fiscal second quarter, investors considering these shares need to realize that this is a tough industry in which to try to earn long-term economic returns.

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Investopedia: Hormel Can't Escape The Retail Tarpits

Volume growth is hard to come by in the food sector today, and even a very well-run company like Hormel Foods (NYSE:HRL) can't escape that forever. With health and economic factors translating into less animal protein consumption, and grain costs likely to work their way through the animal production cycle in 2013, these aren't the easiest of times for Hormel. Although I think the company's strong operating capabilities and focus on packaged/value-added foods will give it an edge on the likes of Tyson (NYSE:TSN) and Smithfield (NYSE:SFD), I'd be careful chasing the stock so close to a 52-week high and a double-digit EV/EBITDA ratio.

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Investopedia: Is Fresh Pork Eclipsing The Value Of Smithfield's Packaged Foods?

On more than one occasion I've written of my preference for companies that serve the processed/packaged food space in favor of those that sell commoditized fresh/frozen products. That's certainly true in the protein sector, where I much prefer the prospects of a company like Hormel (NYSE:HRL) to those of Tyson (NYSE:TSN). However, Smithfield (NYSE:SFD) is a curious case. Although it is one of the many ways traders can invest in everyday products, this company has both a sizable fresh and packaged meats business.

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Investopedia: Can Hormel's Model Shine With The Drought?

Processed foods may not be healthy for us as consumers, but they certainly don't do the producers any harm. Whether you look at a five, 10 or 15-year chart, the performance of Hormel (NYSE:HRL) simply blows away the likes of Tyson (NYSE:TSN), Smithfield (NYSE:SFD) or Pilgrim's Pride (NYSE:PPC). Sure, some of that can be laid at the feet of superior management, but the reality is that it's much better to be the maker of branded processed foods than a virtual commodity supplier of fresh or frozen protein.

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Seeking Alpha: Brasil Foods A Bipolar Brazil Play

There's an old joke that goes something like this - what is a long-term investor? A short-term investor that won't admit a mistake, take a loss, and move on. I don't happen to subscribe to that point of view, but I do admit that Brasil Foods (BRFS) is not the easiest stock to own as Wall Street wavers between breathless enthusiasm for emerging markets and rank skepticism about those same markets.

Brasil Foods absolutely has real challenges today, but the long-term potential for this Brazil-based global food company is enough to keep me interested in the shares.

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Brasil Foods A Bipolar Brazil Play

Investopedia: Tyson Finally Interesting, But Risks Growing

I've stuck to my guns that giant protein producer Tyson Foods (NYSE:TSN) was not an interesting stock until and unless the shares started trading for below book value. Now with worries about rising grain costs and limited additional pricing leverage, the stock may finally be cheap enough to own, but investors must also consider the risk that conditions could get substantially worse before they get better.

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Investopedia: Smithfield's Miss May Be An Opportunity

Companies that operate in commodity markets often require a bit of reverse psychology when it comes to their stocks. Invest in protein producers like Tyson (NYSE:TSN) or Smithfield (NYSE:SFD) when times are great, and you are likely to be buying into a peak. With that in mind, the lackluster performance of Smithfield in its fiscal fourth quarter, combined with some iffy market fundamentals, might make this a stock worth watching.

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