SunOpta Up 35.6%, What To Do Now?

I recommended SunOpta earlier this month. But following a jump thereafter, the stock has started trading sideways for a net gain of 35.6% to date.

 

So I’m thinking, maybe this is a good time to cash out. But let’s take a closer look-

What Does SunOpta Do?

The company sells food, supplements, health and beauty products. It is somewhere in the middle of the food supply chain, sourcing healthy ingredients, some of which are resold and others processed, and then distributed to groceries (2/3) and foodservice (1/3), mainly in the U.S. Its three operating segments are

Global Ingredients (around 40% of total revenue): organic, non-GMO fruits, vegetables, oils, fats, coffee, nuts, dried fruits, sugars, liquid sweeteners, seeds, grains, rice and pulses are sourced globally for trade; cocoa liquor, butter and powder, sunflower kernel, oil and cakes, sesame seeds, and avocado oil are processed before sale. Packaged premium juice products including private label orange juices, lemonades, and functional waters, produced in partnership with consumers are included here. The corn and soy product units were sold during the quarter for $66.5 million, reducing exposure to animal feed.

Plant-based Foods and Beverages (around 30%): beverages, liquid and dry ingredients from almond, soy, coconut, oat, etc; broths, teas and nutritional beverages; sunflower products for food and feed; and roasted snacks. Segment revenue grew 30.7% in the last quarter.

Fruit-based Foods and Beverages (around 30%): individually quick-frozen for retail, quick-frozen and bulk frozen including purées, fruit cups and smoothies for foodservice and fruit snacks. Segment revenue grew 13.7% in the last quarter.

What Makes It Attractive?

Focus on Health: The global pandemic has raised questions about immunity levels, increasing focus on healthy eating. So the very nature of the business that focuses on organic and non-GMO makes the products desirable. This is positive for all segments but particularly Fruit-based, which has a very high retail mix.

Global Sourcing Reduces Risk: While the company sells to American customers, its suppliers span 60 locations across countries, somewhat reducing the inherent risk in seasonal and other variations in agricultural produce. Management said that the company didn’t see any pandemic-related disruption across its supplier and manufacturing operations although weather did impact the availability of some fruit.

Target Market: While the company caters to both retail and foodservice customers, retail is double the size of foodservice. That’s why it did particularly well in the last quarter, with retail growth easily offsetting lockdown-related weakness in foodservice. Management also commented that foodservice should pick up in the current quarter even as retail stabilizes after some binge buying/stocking toward the end of March.

Improving Gross Margin: The company saw gross margin improvement across all segments (adjusting for the sold business within Global Ingredients). The most substantial increase was in Plant-based, followed by Fruit-based and then Global Ingredients. While higher volumes obviously contributed to the increase, management also pointed to production efficiencies in Plant-based and Fruit-based, pricing initiatives in Fruit-based (despite the weather playing spoil sport), and reduced animal feed exposure (which is not a good place to be in, both because of pandemic-induced weakness and the longer-term trend toward veganism) and ongoing traded foods inventory management in Global Ingredients.

Balance Sheet Not Too Bad: Heavy investment, especially in the fastest-growing Plant-based segment has kept the pressure on cash. So net cash remains negative. However, debt to total capital is under 60%, which is positive. Note that the company has sizeable preferred stocks, which makes the debt-cap look better. But there’s also an advantage in that it gives less control to outsiders than common stocks would have.

Zacks Indicators Look Good:

Zacks Rank #2 (Buy)

VGM A (VGM is a composite score allotted to a stock to denote its suitability for value, growth, or momentum investors)

Growth A (a growth score of A or B indicates that the stock is suitable for growth investors)

Value B (A value score of A or B indicates that it is particularly suited for value investors)

Last EPS surprise 33.33%

Loss per share estimate for March and June quarters is steady.

Let’s Take a Look at the Valuation

On the basis of price to forward sales, STKL is trading at a 0.30X multiple, compared to 3.36X for the S&P 500. However, this is the high end of its range over the past year while the S&P 500 is somewhat below its annual high.

The price to book value comparison tells a similar story. STKL’s 2.76X multiple is at the high end of its annual range while the S&P 500’s 4.09X is closer to its median value of 4.06X.

Conclusion

This is a good/safe stock for the longer term and it caters to product segments that will remain in demand for a long while. That said, the recent spike may not be repeated as it was mainly in reaction to the news that the pandemic didn’t negatively impact results and growth prospects remain reasonably bright. As such it could be time to take gains.

Recommendations

Some Zacks #1 (Strong Buy) ranked stocks are Advanced Semiconductor Engineering, Inc. ASX, Frontline Ltd. FRO, Amkor Technology, Inc. AMKR, City Office REIT, Inc. CIO and Gemphire Therapeutics Inc. NRBO.

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