Falling Margins And Stagnant Revenue Signal Trouble Ahead For Growth Aspirations

Key Takeaways

• Strategic investments in new product offerings and facilities aim to support long-term growth in revenue, earnings, and operational efficiency.
  
• Cost-saving initiatives and contract renegotiations are expected to enhance profitability and stabilize revenue against cost fluctuations.
  
• Ingredion's strategic focus on high-margin segments, operational excellence, and successful contract renegotiations enhances earnings potential and supports strong future growth.

Catalysts

Manufactures and sells sweeteners, starches, nutrition ingredients, and biomaterial solutions derived from wet milling and processing corn, and other starch-based materials to a range of industries in North America, South America, the Asia Pacific, Europe, the Middle East, and Africa.

• The integration of Ingredion's new business segment structure and global operating model is contributing to improved profitability by optimizing supply chain efficiencies, procurement savings, and enhancing fixed cost absorption, which supports future gross margin improvement.
  
• Strategic investments in high-growth areas like Texture and Healthful Solutions are expected to drive future revenue and earnings growth through expansion of Ingredion's product offerings and capabilities that meet increasing consumer demand for clean label and health-focused solutions.
  
• Ingredion's Cost2Compete program is focused on delivering $50 million in cost savings by the end of 2025, which could improve net margins and contribute to long-term EPS growth.
  
• Successful renegotiation of multiyear contracts has allowed Ingredion to recover costs absorbed over the last two years, improving profitability and potentially stabilizing revenue streams against input cost fluctuations in future periods.
  
• Strategic capital investments in global facilities, such as debottlenecking and operational improvements, are expected to enhance production capacity and throughput, supporting long-term revenue growth and improved operational efficiency.

Ingredion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ingredion's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.0% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $644.3 million (and earnings per share of $10.09) by about November 2027, down from $683.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, up from 14.8x today. This future PE is lower than the current PE for the US Food industry at 18.3x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Ingredion Future Earnings Per Share Growth

Risks

• Ingredion achieved a significant milestone with a 29% increase in adjusted operating income, the best third quarter performance ever and a testament to the company's dedication and strategy. This could indicate strong future earnings potential.
  
• All segments reported double-digit operating income growth, with successful contract renegotiations supporting margin recovery, suggesting the company can continue to maintain or improve net margins.
  
• Ingredion is experiencing volume growth in differentiated products and solutions, with higher profitability, which could lead to increased revenue.
  
• The company's continued focus on operational excellence, such as the Cost2Compete program and efficient inventory management, is driving structural savings, potentially enhancing net margins and earnings.
  
• The demand for Ingredion's products is supported by strategic investments in texture solutions, sugar reduction, and protein fortification, with expectations for these segments to drive volume growth and revenue going forward.

Valuation

• The analysts have a consensus price target of $140.6 for Ingredion 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 $158.0, and the most bearish reporting a price target of just $125.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.9 billion, earnings will come to $644.3 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $154.86, the analyst's price target of $140.6 is 10.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.