We’re Excited About Undervalued Ingredion

In scanning our coverage for undervalued stocks with an economic moat, narrow-moat Ingredion is a company we’re excited about.

Ingredion manufactures starches and sweeteners by wet milling and processing corn as well as other starch-based raw materials. The company's products are used primarily by food and beverage manufacturers. 

Having recently cut its 2018 guidance, share prices have moved lower and the stock is now undervalued relative to our $131 per share fair value estimate. Ultimately, we think the company will emerge unscathed from recent near-term headwinds it faces. Accordingly, we see attractive risk-adjusted return potential as shares are trading deep in 4-star territory.

Ingredion classifies its products as either core or specialty ingredients. Core ingredients currently generate just over 70% of sales, are typically commodity-grade, and provide little pricing power for Ingredion.

Specialty ingredients, on the other hand, command pricing power and generate profit margins double those of core ingredients.

These specialty ingredients benefit from both the intangible asset and switching cost moat sources and form the basis of our narrow moat rating. They rely on proprietary formulations and often provide inroads to cost savings for customers by replacing larger amounts of commodity-grade ingredients.

Once customers employ Ingredion’s specialty ingredients in their food and beverage offerings, they are typically unwilling to jeopardize the brand equity of their products by switching to alternative products that consumers may reject.

Therefore, as the company’s specialty ingredient portfolio continues to grow and some of its new proprietary formulations gain traction, we forecast profitable growth over the long term and contend that the stock offers an attractive value proposition for investors.