Mexico Tortilla King Leads Bolsa for Third Year as Debt Slashed

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Gruma SAB has developed a recipe to make the world’s biggest tortilla company Mexico’s best-performing stock: Take persistent demand for your product, slash debt, add overseas expansion and embellish with a weak Mexican peso.

Gruma, which sells tortillas in the U.S. under the Mission, Guerrero and Calidad brands, has returned 29 percent this year and is on pace to be the top performer on the Mexican Stock Exchange’s benchmark IPC index for a third consecutive year. The stock has climbed more than 400 percent since a restructuring plan at year-end 2012.

Gruma is extending gains this year as it continues to trim spending and maintain a healthy debt level, according to Chief Financial Officer Raul Cavazos. Gruma’s total debt fell 38 percent in the first quarter to 11.4 billion pesos ($758 million) from the prior year, according to an earnings call.

“We have implemented a strategy to reduce spending and improve our Ebitda margins to ensure a healthy debt level,” Cavazos said in a phone interview from company headquarters in San Pedro Garza Garcia, Mexico. “We have been able to generate very strong margins given cash flows and have a stable, healthy financial standing.” Ebitda is earnings before interest, taxes, depreciation, and amortization.

Gruma, which regained an investment grade rating from Standard & Poor’s on March 27, reduced debt by $474 million in the first quarter. The company, which currently has a 1.45 debt-to-Ebitda ratio, has 79 plants producing tortillas, corn and flour products globally. Gruma fell 1 percent to 201.26 pesos as of 9:38 a.m. in Mexico City.

Profit Focused

Gruma’s improved stock performance has been driven by a restructuring plan implemented in December 2012 to focus more on profit growth than sales gains, Lauren Torres, an equity analyst at UBS AG, said in a phone interview from New York. Gruma increased fivefold since 2013 to 203.36 pesos at the close Wednesday. Net income rose by 58 percent in the first quarter to 982.5 million pesos.

“Gruma saw there were opportunities to streamline to create a more efficient business,” Torres said. “The company has been producing much more attractive margins for investors the last few years.”

The stock has 11 buy, three hold and two sell recommendations, according to data compiled by Bloomberg.

Gruma has implemented a two-pronged strategy by reducing excessive spending and improving the company’s Ebitda margins, CFO Cavazos said. Gruma has trimmed television advertising and removed company sponsorship from regional soccer teams, according to Carlos Hermosillo, an equity analyst at Mexico City-based Actinver SA.

Peso Slide

Gruma’s first-quarter Ebitda increased 16 percent to 2 billion pesos from a year earlier, the company said on its earnings call.

“The company has exhibited much more control and been stricter in its spending,” Hermosillo said in a phone interview. “The result has been much more money to invest in activities that increase investor value.”

Gruma’s improved results have been coupled with the devaluation of the Mexican peso, which has lost about 14 percent in the past 12 months, or 3.3 percent this year. Given that about 73 percent of the company’s revenue is generated outside of Mexico, Gruma’s bottom line has been boosted by the stronger U.S. dollar, Cavazos said.

Most of the company’s 4 percent sales volume gain in the first quarter came from the peso’s depreciation on U.S. operations, Cavazos said.

Organic Growth

Gruma’s U.S. businesses, which account for 54 percent of total sales, should continue to benefit from the peso slide this year, Barclays analyst Benjamin M. Theurer said in a research report on April 9. The Mexican peso could fall to 16.5 per U.S. dollar by the end of the year from its current value of 15.25 if the U.S. Federal Reserve increases lending rates, he said. In the past year the peso was as high as 12.9 versus the dollar.

The company, which announced the acquisition of Spain’s Azteca Foods for 45 million euros ($51 million) in March, has no immediate acquisition plans and is focused on organic growth, Cavazos said. Gruma plans to improve operations with better distribution points and access to Gruma products in Europe, Asia and the U.S., he said.

Further purchases would probably be small and similar to Azteca to expand volume and distribution in nascent markets, Actinver’s Hermosillo said.

“Gruma’s growth margins this year are likely to continue at a pace similar to last year as the company creates more growth opportunities through better operational efficiency,” Brian Flores, a senior equity analyst at Interacciones Casa de Bolsa SA, said in a phone interview from Mexico City. “It is well positioned to continue being one of the country’s best performing companies.”

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