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Stock Strategist

Ingredion Benefits From Improving Product Mix

As specialty ingredients make up more of the portfolio, we expect rising profits.

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 Ingredion (INGR) manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the starches from coproducts (animal feed and corn oil). The starches are then further processed into starch and sweetener ingredients used primarily by the food and beverage industries, as well as the paper, corrugating, brewing, and personal care industries.

The company classifies its products as either core or specialty ingredients, with core ingredients generating roughly 70% of companywide sales (as reported) and just below 50% of profits (based on our estimates). Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core sales on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. They typically command twice the gross margins and enjoy twice the sales growth of core ingredients. Although we expect demand for Ingredion’s core ingredients to grow roughly in line with GDP in the regions where they are sold, specialty ingredient volume should grow in the mid- to high single digits.

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Seth Goldstein does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.