Better For You Product Line Expansion Will Open Global Markets

Key Takeaways

• Growth of the Better For You line in the U.S. retail channel will continue driving revenue through consistent annual performance.
  
• Capacity expansion in Central America and increased European distribution enhance sales potential, supporting EBITDA growth and profitability.
  
• Challenges including declining U.S. volumes, European logistical issues, currency fluctuations, and rising costs in various regions could pressure Gruma's revenue and profitability.

Catalysts

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

• Gruma's Better For You product line, which has been growing at around 15% annually, is expected to continue driving growth in the U.S. retail channel. This could positively impact future revenue.
  
• The planned capacity expansion in Central America to meet strong demand indicates potential for increased sales and EBITDA growth in the region due to enhanced production capabilities.
  
• The expansion of Gruma's product distribution throughout Europe, particularly in the retail tortilla market, is poised to enhance sales volumes and profitability due to a favorable product mix change.
  
• Sequential recovery in the U.S. foodservice channel suggests potential for volume recovery and improved revenue, as Gruma works on regaining accounts and increasing sales.
  
• Gruma’s defensive business model, along with strategic marketing, is expected to mitigate competitive pressures, potentially preserving or enhancing net margins despite market challenges.

Gruma. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gruma. de's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.6% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $598.5 million (and earnings per share of $1.67) by about May 2028, up from $546.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $744.6 million in earnings, and the most bearish expecting $525.8 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 12.2x today. This future PE is greater than the current PE for the MX Food industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 2.46% 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 U.S. foodservice channel has experienced a significant decline in volumes, dragging down revenue and volume results for Gruma in the U.S. market, which could impact future earnings if recovery is slower than anticipated.
  
• The weakening consumer sentiment and increased selectivity in the U.S. market present challenges, alongside intensified competition from private labels and competitors aggressively recapturing market share, potentially affecting revenue growth.
  
• The European corn milling business is facing logistical challenges and tough comparatives, which have led to a decline in sales volumes, impacting overall European revenues and potentially affecting profitability.
  
• Currency fluctuations, especially a weaker Mexican peso, have negatively impacted reported sales and could continue to affect revenue and earnings if the peso remains volatile.
  
• Rising costs in certain geographies, including indirect manufacturing costs and higher labor costs in Asia and Oceania, as well as significant expenses related to aggressive marketing strategies in the U.S., could pressure net margins and earnings unless effectively managed.

Valuation

• The analysts have a consensus price target of MX$413.077 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$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 $7.1 billion, earnings will come to $598.5 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$366.28, the analyst price target of MX$413.08 is 11.3% 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.