Will a fresh coat of paint increase Corn Product’s share price?



Corn Products International Inc. is changing its name to Ingredion Inc. in a bid to unlock hidden value for shareholders. But the company may have to push harder through buybacks and larger dividends for that to happen.

Presenting at Citigroup Inc.’s 2012 Global Consumer Conference in New York on Tuesday,  Chairman Ilene Gordon questioned the company’s current valuation:

“I don’t know why the price-to-earnings is still 10,” she said. “I think it should be higher. We’re not a commodity company. If you look at the ingredients we are selling, we are adding a lot of value.”

At around $52 per share, CPO’s forward price-to-earnings stands at 9.3, a bargain buy but slow-growth company, versus the S&P 500’s p/e of 21.14.

Last week, shareholders approved of the name change to Ingredion Inc., which management says better reflects the value-added ingredient manufacturer of starches and sweeteners it is—not simply a raw material post-processor. The name change will go into effect June 4, 2012.

The name switch to Ingredion Inc. could be read as play to push up shareholder value and drive the p/e number upwards. Rebranding the company favorably realigns it with ingredient manufacturers and away from the perception it is vulnerable to commodity price swings. So is Wall Street undervaluing the company?

While not altogether unconvinced, analysts are treating the name change and industry realignment with soft skepticism.

Analyst Ian Horowitz of Topeka Capital Markets Inc. has said that although it makes sense for the company to push into the higher margin territory of ingredients producers, the old business did just fine. In 2010, CPO purchased National Starch, a specialty starch company, to expand its ingredient portfolio.

Still, investors are looking for the company’s financial decisions to reflect an ingredient company as well, “Management noted that it will continue to review its payout ratio versus potential investment,” said analyst Ann Gurkin of Davenport & Company LLC, in a note.

Ingredient companies tend to return dividends of 20 percent to 25 percent. CPO is returning 15 percent to 20 percent to investors, because it is still spending more on capital expenses. It may not quite be the ingredient company management wants it to be, thus its lower position on the price-to-earnings totem pole.

CPO’s trailing p/e is 11.4 as compared with a sampling of sector peers for an average of 15.6, which includes ingredient and food producers Archer Daniels Midland Co., Bunge Ltd., ConAgra Foods Inc. and Kraft Foods Inc. Compared with sector competitors, this lower p/e suggests investors are predicting only marginal growth potential. Gurkin also mentioned reduced growth expectations for the year:

“Management noted that it expects pricing to be a strong contributor in 2012; however, the company reduced its outlook on volume growth to 2-3 percent from 4-5 percent previously, reflecting weaker South American volumes.”

CPO is a cyclical company that tends to realize most of its profitability in the second half of the year. This is reflected in its positively low price-to-sales. The company has a price-to-sales number of .62, or 62 cents spent for every dollar of revenue generated, in line with the sector average of 61 cents spent for every dollar in revenues.

Corn Product’s price-to-book value of 1.78 is higher than its sector peers. A lower price-to-book ratio is common for companies that have higher capital infrastructure costs, such as transportation, raw material and storage. This above-industry average suggests CPO is outperforming peers, more capably converting capital costs into revenue.

Analysts are predicting CPO will reach a high of $65 to $70 per share by the year’s end. Given the reliable cyclicality of this stock, and barring no unexpected swings in commodity prices, this stock may be attractive.

Leave a Reply