Expansion Into Better For You Products May Capture Demand, Yet Inflation Risks Persist

Key Takeaways

• Strategic focus on Better For You products and new plant in China indicates potential for revenue and sales growth in high-demand global markets.
  
• Capacity expansions and share repurchase program suggest future sales growth and commitment to enhancing shareholder value through EPS growth.
  
• Inflation, geopolitical issues, and competitive pressures could limit revenue growth and impact margins, while currency fluctuations and high operational costs strain earnings.

Catalysts

Produces and sells corn flour, tortillas, and other related products.

• Gruma's expansion into the Better For You product line in the U.S. and increased distribution in Europe and Asia suggest a strategic focus on high-growth and high-demand product categories, which could drive future revenue growth.
  
• The completion and operational status of the new plant in Foshan, China, signal increased production capacity and potential market capture in Asia, contributing to an anticipated increase in sales volumes and earnings.
  
• Strategic investments in capacity expansions in Central America and Europe aim to address current capacity constraints, suggesting potential future sales and EBITDA growth once these expansions are operational.
  
• Anticipation of recovery in the foodservice business in the U.S. in the second half of 2025 could lead to increased sales volumes and margin improvements, impacting overall earnings positively.
  
• Aggressive share repurchase program, made possible by a strong financial position and robust free cash flow, reflects Gruma's commitment to enhancing shareholder value and could contribute to EPS growth.

Gruma. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gruma. de's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.2% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $550.2 million (and earnings per share of $1.47) by about February 2028, up from $531.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the MX Food industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.72%, as per the Simply Wall St company report.

Gruma. de Future Earnings Per Share Growth

Risks

• Inflationary pressures and price sensitivity in the U.S. foodservice sector could limit revenue growth and negatively impact net margins.
  
• Geopolitical effects in Europe could disrupt operations, affecting corn flour volumes and potentially reducing earnings.
  
• The weakening Mexican peso impacts the translation of Mexican operations into U.S. dollars, potentially diminishing reported revenue growth and EBITDA margins.
  
• Competitive pressures, particularly in the U.S., could force Gruma to engage in promotions or defensive strategies, impacting net margins and market share retention.
  
• Higher operational costs in Asia, particularly in China, could lead to EBITDA contraction, affecting overall earnings growth.

Valuation

• The analysts have a consensus price target of MX$404.077 for Gruma. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$460.0, and the most bearish reporting a price target of just MX$301.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $550.2 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 13.7%.
  
• Given the current share price of MX$359.91, the analyst price target of MX$404.08 is 10.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.