Morningstar on Ingredion

Ingredion (INGR) is a difficult company to describe. Morningstar does a pretty good job. If you’re a fan of INGR, I recommend giving this a read. There are so many good parts but here are some highlights:

Ingredion (INGR) manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the starches from coproducts (animal feed and corn oil). The starches are then further processed into starch and sweetener ingredients used primarily by the food and beverage industries, as well as the paper, corrugating, brewing, and personal care industries.

The company classifies its products as either core or specialty ingredients, with core ingredients generating roughly 70% of companywide sales (as reported) and just below 50% of profits (based on our estimates). Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core sales on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. They typically command twice the gross margins and enjoy twice the sales growth of core ingredients. Although we expect demand for Ingredion’s core ingredients to grow roughly in line with GDP in the regions where they are sold, specialty ingredient volume should grow in the mid- to high single digits.

(…)

The most appropriate lens through which to analyze Ingredion’s competitive advantage is our moat framework for commodity processors. Moaty businesses that operate in this space tend to benefit from switching costs, intangible assets, or cost advantage. For Ingredion, we see evidence of switching costs and intangible assets, but not cost advantage. Slightly more than 70% of companywide sales involve the processing of raw materials (corn, tapioca, potatoes, rice) purchased at market prices into commodity-grade starch and sweetener ingredients over which Ingredion commands no pricing power. We view this core ingredients business as having no moat. With roughly half of its sales priced on a cost-plus basis, the core ingredients business should generally deliver returns on invested capital in line with the company’s weighted average cost of capital.

We believe Ingredion’s specialty ingredients business operates with a narrow moat and earns excess ROICs. As a result, it has served as the key driver of the positive economic profit spread witnessed on a companywide basis each year over the past decade. The evidence for switching costs and intangible assets stems predominantly from Ingredion’s specialty ingredients business, which accounts for slightly less than 30% of Ingredion’s sales and just over half of its profits.

(…)

Given the scale of Ingredion’s commodity operations, the qualitative evidence for a companywide moat is arguable. However, the quantitative evidence is strong. Ingredion’s ROICs have consistently exceeded the company’s weighted average cost of capital in recent years. Based on our calculations, ROICs have averaged 11.5% over the trailing 10-year period, safely above our assumed 8.2% WACC. Due primarily to an improving product mix driving very modest margin expansion, our midcycle ROIC forecast sits slightly above 12%, and we feel confident that economic profits will persist at least 10 years into the future. Although corn prices, Ingredion’s key input cost, can fluctuate significantly, half of Ingredion’s core sales are priced on a cost-plus basis, which essentially locks in returns roughly in line with the company’s cost of capital. For the remaining half of core sales, the company’s active hedging strategy should help minimize ROIC volatility in the years to come. As evidence of the stability of its business, Ingredion generated positive economic profits during both the financial crisis and the North American corn drought of 2012.

Posted by on June 18th, 2018 at 11:01 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.