SunOpta (STKL | SOY)
SunOpta (NASDAQ: STKL | TSX: SOY)
< Updated for Q2-2022 results >
Profile:
SunOpta Inc. (the “Company”) was founded in 1973 under the laws of Canada. The company is listed on Nasdaq (STKL) and TSX (SOY). It operates under two major segments: 1) plant-based products and 2) fruit-based products. Up until late 2020, the company had a third operating division, namely Organic and non-GMO, which were sold. Currently, it has facilities in Canada, USA, and Mexico. The company sells its products in two forms: 1) as the final product to retailers or wholesalers and 2) as ingredients to other food processing companies.
In 2021, the Company moved its headquarters to Eden Prairie, Minnesota.
Sector: Consumer Defensive
Industry: Packaged Foods
5-year chart comparing SunOpta (blue) with three competitors as well as S&P500 Consumer Defensive Index (yellow)
STKL: SunOpta | FARM: Farmer Bros. Co. | LNDC: Landec Corporation | PPC: Pilgrim’s Price Corporation
S&P 500 Consumer Defensive Index: ^SP500-30
Source: Yahoo Finance
Business Strategy:
The Company defines itself as “a leading company focused on the development and manufacturing of plant-based and fruit-based food and beverage products.” There has been a slight shift in the Company’s strategy since late 2019, as it is steering away from presenting itself as a business that promotes health and sustainable well-being. In line with this change in strategy, the facilities that were under an operating segment referred to as Global Ingredients (including organic ingredients) were sold in late 2020.
The Company is constructing a new 285,000 square feet (SF) plant-based facility in Texas. This facility can be expanded to 400,00 SF with an estimated capital expenditure of $118 million. The construction will be completed in late 2022 and cash flow generation will start in Q1-2023.
Management & Board of Directors
As mentioned above, the new CEO, Mr. Joe Ennen, was appointed in late 2019. Mr. Ennen has years of experience in the food processing and food distribution business and was previously the CEO of Columbus Foods (processed meat) and SVP Consumer Brands at Safeway.
The board of directors is comprised of 9 board members, which with the exception of the CEO, the remaining members are independent directors. All of the board members are prominent professionals who have expertise in the field and are sitting on other boards as well.
Are management’s interests aligned with shareholders?
Top management’s bonuses are tied to financial performance and are paid in shares, which is a positive step in the alignment of interests. The risk factor associated with linking bonuses with financial performance is that it might encourage management to prioritize short-term benefits over the long-term benefits of the company.
The base salary of CEO, CFO, and VPs are not unusually high. The salary differential between the top executives is also not significant. This is a positive sign.
The Compensation Committee is in charge of the approval of the compensation for the executives.
Financial Performance:
The following are our observations when comparing annual financial statements from 2017 to 2021 year-ends:
Subsequent to the sale of the assets in 2020:
the Company’s asset turnover ratio was reduced. Reduction in revenue was expected.
Percentage gross margin increased from approximately 10% to approximately 12%.
Interest expense was reduced significantly.
Loss per share was reduced significantly.
Based on Q2-2022 results:
Asset turnover ratio, payable turnover ratio, and inventory turnover ratio remained consistent with 2021 and 2020.
AR turnover ratio increased in 2022, indicating a better collection.
Gross profit percentage increased to 13% in 2022.
Projected annualized revenue is set to increase by 19% in 2022 compared with 2021.
Overall, the financial performance of the company shows signs of improvement.
What are analysts saying about the Company?
It appears that not many analysts follow SunOpta. This is actually good according to Peter Lynch because as soon as the big investment firms (and their analysts) start following a stock, the value goes up suddenly and it’s too late for a significant price appreciation.
Growth opportunity:
The market for plant-based food products is growing and the company is well poised to take advantage of this growth by providing both final products and ingredients. It appears that the company has a strong internal accounting system for costing, allowing them to measure profitability by product, production plant, market, customer, etc.
The company has solid plans for growth and reducing production costs.
Capital Structure:
The company took advantage of the low-interest rate climate and refinanced its debt with more favorable terms, which includes higher borrowing capacity and lower interest rate.
In Feb 2021, Oaktree Capital which held preferred shares converted its position to common shares at a price of $7 per share.
Analysis
Our analysis is based on the guidelines provided by the Company for future growth while using conservative market assumptions (such as exit multiples and discount rates). We believe that given the economic uncertainty ahead, such market assumptions are reasonable. Under these assumptions, we calculated that the lower range of the fair value is $11.64 per share.
SunOpta Sock Analysis - Excel
SunOpta Sock Analysis - PDF