SunOpta Seen Gaining as Shoppers Go Organic

SunOpta Inc., the Canadian food manufacturer that processes more organic soybeans in the U.S. than any other company, is poised to increase investor returns as consumers buy more non-genetically modified and organic foods.

SunOpta has surged 46 percent this year, the best return among six food-processing stocks in Canada and almost four times the 10-percent average. Analysts covering Brampton, Ontario-based SunOpta expect the shares to gain 2.9 percent over the next 12 months, according to ratings compiled by Bloomberg.

“SunOpta is almost entirely focused on natural and organic foods and there are no direct comparable competitors,” said Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald LP who recommends investors buy the shares. “The ongoing trend is that people want to eat healthy food and that segment is growing much faster than the broader food market.”

Food labeled organic is about $30 billion or about 10 percent of the $400 billion North American food retail market, and is growing “in the teens,” Kenneth Shea, a food and beverage analyst at Bloomberg Industries said in a phone interview yesterday. “Virtually all supermarkets are dedicating more and more shelf space to organics. That’s gradually bringing organic products to a wider group of consumers.”

SunOpta, which posted record profit of C$24.2 million ($23.8 million) on revenue of C$1.1 billion last year, is the world’s largest producer of oat fiber for the food industry, the largest producer of private label natural and organic fruit snacks as well as the leading U.S. organic soybean processor, according to its website.

Packaged Food

The company is considering growing faster through acquisitions as it moves toward producing more packaged goods from raw materials and distribution, according to an investor presentation on its website. SunOpta has made four purchases over the past three years and plans to sell stakes in businesses unrelated to its main operations, the presentation said.

Chief Executive Officer Steven Bromley declined requests for an interview, through company spokeswoman Susan Wiekenkamp.

“We believe that 2013 will be another successful year for our company as we continue to execute on our core strategies of growing our value-added packaged foods and ingredients portfolio,” CEO Bromley said in a May 7 statement when the company reported first-quarter results. “We believe SunOpta is well positioned to capitalize on future growth opportunities as consumers around the world are increasingly focused on healthy eating and healthy living.”

Acquisition Potential

Management is aware of the acquisition opportunities out there, said Sheila Broughton, an analyst at PI Financial Corp. in Vancouver, who rates the shares “buy” with a target price of $9.41. “Their performance is a reflection of a healthier consumer eating bias. SunOpta is also adding capacity in an orderly strategy, adding a line when demand is there.”

The company has seven buy ratings, two holds and one sell, according to analyst ratings compiled by Bloomberg. The average price target is C$8.41 over the next 12 months, indicating a potential return of 2.9 percent from SunOpta’s closing share price of C$8.17 in Toronto today.

West Face

“We’re very pleased with the company’s execution and share-price performance,” said Greg Boland, chief executive officer and founder of activist fund West Face Capital Inc. in Toronto. The firm is the largest shareholder of SunOpta with a 12 percent stake, according to data compiled by Bloomberg.

West Face first began investing in SunOpta in mid-2011, Boland said. One of the fund’s founders, Peter Fraser, joined the board in June 2012. West Face also owns about 11 percent of meat processor Maple Leaf Foods Inc.

Boland declined to comment on whether the firm plans to either increase or decrease its holdings in SunOpta.

SunOpta’s net income will rise 17 percent to $28.2 million this year, according to the estimates of five analysts surveyed by Bloomberg.

“SunOpta’s strategy is to expand its value-added and higher-margin consumer packaging and ingredient processing capabilities,” said PI Financial’s Broughton, in a note to investors on May 8. The company is introducing new products including re-sealable pouches in 2013 which “offer the best opportunities for long-term revenue and profitability growth.”

Health Benefits

SunOpta is the only Canadian manufacturer in a group of 12 companies identified by Shea and colleagues as the largest companies whose sales consist mostly of packaged foods emphasizing fresh or organic ingredients or promoting health benefits such as gluten-free.

The company’s 2013 price-to-earnings ratio is the third-lowest in the group at 18.8 times, trailing Chiquita Brands International Inc. and Fresh Del Monte Produce Inc. which offer lower valuations for earnings growth, according to data compiled by Bloomberg.

The organic food market is “huge” and growing at five times the pace of the overall market as consumers seek healthier options, said Walter Robb, co-chief executive officer of Whole Foods Market Inc., the largest natural-goods grocer in the U.S., in an April 29 interview with Bloomberg TV. At the same time, regulators are beginning to demand labeling of genetically modified organisms, including Connecticut legislators who passed a bill earlier this month requiring such labeling if nearby states adopt it.

Genetically Modified

Genetically altered Monsanto Co. wheat was found in an Oregon field in April, almost a decade after the company abandoned plans to sell the herbicide-resistant wheat variety. Farmers growing genetically-modified crops face export restrictions, while scientists warn that such incidents are likely to persist, given weak federal rules and the strength of natural selection.

Catalysts that could boost the organic sector further include more “clarity” from the U.S. Food and Drug Administration regarding the benefits of organic food, Shea at Bloomberg Industries said. “Those will take time to come out, but could help the sector reach a mass audience,” he said.

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