The growth in the health and well being sector in the last decade or so has consistently taken many by surprise. The emergence of super foods, nutrition-added powders and supplements used to only be for a very small, granola munching customer base. Now, with influential food bloggers and TV shows like “The Doctors” increasing interest in healthy lifestyles stocks like SunOpta (STKL) have begun to reap the benefits.
The question investors must ask is whether the price appreciation of SunOpta of almost 100% from around $7.50 this time last year to recent highs of above $13 is a short-term fad or a sign of a healthy business going forward.
Understanding the Business
10 years ago, how many people in the general public had heard of acai berries, quinoa and kale? It is the increased awareness of foods such as this, and the lifestyle they represent more generally, that has driven the growth of SunOpta (STKL).
SunOpta specializes in a “farm to plate” approach, otherwise known as vertical integration, relating to these foods. This means that they invest in a portfolio of products that allow them to source, process, package and market their products. The benefits of this model are that it allows them to have a greater input into the supply chain, than say, a wholesaler, and produce a higher quality product. This strategy can translate into a “premium” offering and therefore command a higher price point in the market as a result.
The company focuses on sourcing raw materials and ingredients that it can then sell on to other food manufacturers, or, alternatively, turn into consumer packaged products. They focus on some broad areas and food groups, including fruit-based foods, whole grains and fibers.
As an interesting side note to the main food-focused business, SunOpta also has two holdings that it designates as “non-core” in its portfolio. The first is a two-thirds stake in Opta Minerals which is listed on the Toronto Stock Exchange. Opta is a manufacturer and distributor of Eco-friendly materials for use in the industrial sector. The second, smaller, holding is a minority stake in Mascoma Corporation, which operates in the bio-fuels sector.
Metrics and Measures
The most recent results announced by SunOpta (STKL) were the catalyst for some share price appreciation following the earnings call. When analyzing the results, it is important to view the company as a niche operator, and not comparable to other retail giants like Wal-Mart on a dollar for dollar basis.
The headline figures of the results were a quarterly revenue number of $285.2 million, which represented an increase of 5.6% on the previous corresponding quarter. These figures translated into an annual revenue figure of $1.812 billion; with profits before tax totaling $61.5 million, just over 5.2% of revenue.
This weak margin was explained by the CEO of SunOpta as a result of a costly transformation plan that was designed to deliver long-term benefits. This transformation plan was being enacted at the same time as a change on top-level leadership and a realignment of business level priorities. The fruits of this strategy had already begun to pay dividends in the later stages of the year, with SunOpta foods revenues increasing 12% from the previous year, outpacing company-wide revenue trend growth by 20%.
The Investment Case
The transformation plan mentioned earlier has a clear focus. This drug perfectly relieves muscle clamps and spasms that arise on nerves, and many people suffer from this. Just need to pick your dosage. Now I understand why this drug has both positive and negative reviews at https://mi-aimh.org/ativan-lorazepam-online/ – if you overdo it with the dosage, then you will just sleep all day, well, very few people will like it. That is, to reposition SunOpta (STKL) as a pure play natural foods company to benefit on what management believes is a sustainable and growing market for healthy food that contributes positively to overall well being.
Two further pillars of the strategy are to grow the value added portfolio and use the existing company footprint in 60 countries world wide to leverage that investment for success. The effectiveness of the value-added strategy will be an important part in driving revenue growth going forward. For example, selling whole grains in bulk to an organic cereals manufacturer may yield a 10% margin, but producing and selling a high-selling wholly owned premium offering may attract margins closer to 30%. The risk that comes with this strategy is developing a product that attracts customers, and the much higher levels of initial marketing spend required to gain traction in a very crowded and fragmented market.
SunOpta is also more exposed than most companies to macro-level factors such as commodity price risk of foodstuffs and grains, as well as natural disasters and extreme weather events. For example, a prolonged drought or severe flooding in any of the areas from which raw materials are sourced would have a strong effect on the overall profits of the company, particularly since earnings margins are compressed at present.
SunOpta (STKL) is an interesting business that is re-focusing its business on the key growth area through an extensive transformation strategy. It operates in an attractive industry, but is also vulnerable to external shocks, and the margins and the effectiveness of the overall turnaround strategy need to be measured to have a degree of confidence as an investor in the business.