Ingredion Earnings: Profits Grow Despite Volume Decline

After updating our model to incorporate Ingredion’s INGR second-quarter results, we maintain our $120 per share fair value estimate and narrow moat rating.

Despite reporting an 18% growth in adjusted operating income in the second quarter and management slightly raising 2023 adjusted EPS guidance, Ingredion’s shares were down nearly 8% on the day. We think the market reacted to volumes falling 11% during the quarter as an indication of a potentially lower 2024 outlook as Ingredion’s commodity ingredient prices will likely come in lower following falling corn prices. However, at current prices, we view shares as slightly undervalued, with the stock trading at roughly a 15% discount to our fair value estimate.

Management attributed the falling volumes to less inventory throughout the food and beverage supply chain as a result of consumers ultimately purchasing less, as well as a slowdown in non-food and beverage end markets, such industrial starches used to make paper and packaging products. While the midpoint of management’s increased assumes demand begins to return in the fourth quarter, we forecast Ingredion will finish closer to the bottom of the guidance range, which implies demand does not return in 2023.

Regardless, we continue to think Ingredion is well positioned for steady, long-term profit growth as the company benefits from shifting consumer preferences that drive demand for Ingredion’s specialty products, such as growing demand for natural sweeteners. Over time, this should shift Ingredion’s sales and profit mix from our estimates of 34% and 51% of sales and profits, respectively, coming from specialty ingredients, to 60% and 40% over the next several years. In turn, this should drive less volatility in profits over time as the company’s commodity tend to be subject to greater cyclicality.