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Gruma Offers An Interesting Mix Of Offense And Defense

Apr. 03, 2021 10:12 PM ETGruma, S.A.B. de C.V. (GPAGF)GMKKY1 Comment
Stephen Simpson profile picture
Stephen Simpson


  • Gruma is a staple food provider in Mexico and offers revenue growth and operating leverage potential in the U.S. and Europe through premiumization, increased scale, and changing eating habits.
  • Commodity inflation is a manageable risk, with the U.S. business fully hedged and pricing leverage in Mexico.
  • Foodservice demand should rebound as pandemic-driven restrictions are lifted over time, and increased shelf space and premium assortment in the U.S. offers margin leverage opportunities.
  • Mid-single-digit revenue and FCF growth and mid-teens ROICs support a near-term fair value 15% to 25% above today's price and decent prospective return thereafter.

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

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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