RBC Analyst Lowers Estimates of SunOpta to Reflect Short-Term Cost Pressure

Canadian organic food distributor SunOpta Inc. (STKL) continues to have strong sales trends, but second-half earnings will be weighted to the fourth quarter says RBC analyst Edward Aaron.

The result is that Mr. Aaron has taken down his third-quarter estimate “out of conservatism” to $0.06 a share from $0.08 “to reflect short-term cost pressure” on the company’s ingredients business and, to a less extent, the grains and foods division. (Consensus estimates stand at $0.07). He adds that this is a short-term timing issue. “As such, our fourth-quarter and full 2009 estimates are unchanged” at $0.25, the low end of the company’s guidance.

Mr. Aaron has also reduced the price target on SunOpta to $7 from $8. He assigns $5 of that to the company’s food group, using a multiple of 16 times estimated 2009 earnings. Shares of the company now trade just above $4.

With an outperform rating on the company’s stock, Mr. Aaron says “management is showing prudent discipline with managing the balance sheet,” focusing on receivables and inventory while controlling capex.

Comments

[Datasource2000:]

<< Mr. Aaron says “management is showing prudent discipline with managing the balance sheet,” focusing on receivables and inventory while controlling capex. >>

This has been management's stated objective for over two years now.

But their actions speak otherwise. An imprudent and uncontrolled inventory build in the Fruit sector led to a huge writedown a year ago. The company continues to open credit lines, and then use that money to make acquisitions.

The inventory has become so bloated that the stated value of inventory (as of the last filing), is now greater than the market cap of the entire company.

Additionally, given that this is a food company, much of that inventory is perishable food items and/or is subject ot large commodity price swings.

2008 Oct 26 01:58 PM