Rising Demand For 'Better For You' Tortillas And Global Expansion Will Strengthen Future Performance

Key Takeaways

• Revenue growth may surge through enhanced distribution, increased demand, and expansions in key regions, driving efficiency and margins.
  
• Strategic financial maneuvers, including share repurchase and refinancing, will likely improve stability, earnings, and profitability.
  
• Gruma faces risks to earnings and margins due to flat volume, currency effects, strong competition, geopolitical tensions, and rising costs across key markets.

Catalysts

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

• Enhanced product distribution and higher demand for the Better For You tortilla category in the U.S. and Europe is expected to drive revenue growth.
  
• Increased output capacity through CapEx, including new plants in China and expansions in the U.S. and Spain, could lead to higher revenues and improved net margins by maximizing production efficiency.
  
• Aggressive share repurchase program due to undervalued stock is set to boost earnings per share (EPS) by reducing outstanding shares.
  
• Sustained growth in European and Asian markets, particularly in retail tortilla sales and foodservice channels, is projected to expand market reach and boost sales and EBITDA margins.
  
• Financial strategies, like refinancing of bonds and maintaining strong liquidity, provide stability and a lower net debt-to-EBITDA ratio, potentially improving financial ratios and profitability.

Gruma. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gruma. de's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $604.6 million (and earnings per share of $1.67) by about April 2028, up from $531.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $713.2 million in earnings, and the most bearish expecting $503.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 12.5x today. This future PE is greater than the current PE for the MX Food industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 1.34% 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

• The flat consolidated volume in both tortilla and corn flour products could hinder revenue growth, especially if inflationary pressures continue to affect consumer purchasing behavior in the U.S., a key market for Gruma.
  
• The weakening of the Mexican peso negatively impacts reported earnings in U.S. dollars, with EBITDA and sales already affected by currency translation, posing a risk to reported financials and investor perception.
  
• Strong competition, particularly in the U.S. market with private labels gaining significant market share, could force Gruma to enter into pricing promotions that may compress margins and affect net margins adversely.
  
• Geopolitical tensions in Europe may continue to disrupt logistics and raise costs, leading to increased operational expenses, which could impact Gruma’s net earnings if cost management strategies are ineffective.
  
• The potential for increased logistic and labor costs in several key regions, including the U.S., Europe, and Asia, could erode operational margins and reduce overall profitability, posing a risk to earnings expansion.

Valuation

• The analysts have a consensus price target of MX$411.538 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$480.0, 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 $7.0 billion, earnings will come to $604.6 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 13.7%.
• Given the current share price of MX$371.66, the analyst price target of MX$411.54 is 9.7% higher.
• 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.