Though there have been a few exceptions, defensive food stocks haven’t performed so well over the last six months or so, as investors have switched back to industries and stocks offering more leverage to post-pandemic recovery and growth. Mexico’s Gruma (OTCPK:GPAGF) (OTCPK:GMKKY) is no exception, as pretty solid financial performance has gone largely unrewarded in recent months.
I was lukewarm on Gruma back in September, mostly just because I thought the market had caught up with the story. I’m a little more bullish now, and I like the company’s combination of somewhat defensive basic food exposure to Latin America, growth opportunities in the U.S. and Europe, and margin leverage. I believe the shares trade at a greater than 15% discount to fair value now, and would still offer a decent mid-to-high single-digit return thereafter.
Commodity Inflation Remains A Risk, But A Manageable Risk
One of the reasons I call Gruma “somewhat defensive” as a basic food company in Latin America is because the company is still exposed to grain prices in Mexico. Hedging that risk is often impractical, but the company has generally been able to offset grain prices with price hikes (and is expecting to do so again this year). In the past, these shares have often traded as an inverse proxy for corn prices because of this exposure.
The U.S. business, however, is fully hedged for 2021 and at prices better than what the company paid in 2020. This actually matters quite a bit more. The U.S. business is twice the size of the Mexico operations in terms of revenue and almost three times larger in terms of EBITDA. Moreover, with value-added products making up a far larger share of the U.S. business, there are more options on pricing.
The U.S. Growth Story Remains Attractive
Gruma still has
