STKL | New Best Idea Long | Buy the dip

10/30/20 07:55AM EDT

SunOpta (STKL) reported 3Q20 revenue of $314.98M, which beat consensus by $2.33M and grew 6.4% year-over-over with strong performance across all segments plant-based business segment.  Breaking down the segments, the Global Ingredients reported revenues of $123.3M (+8.8% YoY), Plant-Based Foods, and Beverages of $99M (+7.9% YoY), and Fruit-Based Foods and Beverages of $92.6M (+2% YoY).  Gross margin increased 440 basis points to 13.3% from 8.9% a year ago, the highest since 2012, with each segment delivering expanded margins.  The revenue growth and stronger operations led to a 129% gain in adjusted EBITDA at $22.8M vs. $9.9M in Q3 2019.  The consensus was $20.5 million.

SunOpta is one of the strongest players in the growing plant-based food category.  Consumer demand in the company's core categories continues to be some of the best in the consumer space. The company is operating close to capacity in Q4 so far. Importantly the focus and investment in plant-based growth drivers will provide a continuous source of strength.  The evidence will be that the new investments that come online during the fourth quarter set the company up for continued strong growth in 2021 and beyond. Management expects the three expansion projects to add $100M when fully utilized - which could be the end of 2022. Management was also confident in the goal of doubling plant-based capacity over the next three years. 

SunOpta, Inc. engages in the sourcing, processing, and packaging organic and non-genetically modified food and beverage products. It operates through the following segments: Global Ingredients, Plant-Based Foods and Beverages, and Fruit-Based Foods and Beverages. The company's mix of business can be seen in the following chart.

STKL | New Best Idea Long | Buy the dip - stkl mix

The Global Ingredients segment focuses on the procurement and sale of specialty and organic grains and seeds, raw material ingredients, value-added grain, cocoa-based ingredients, and organic commodities. The Plant-Based Foods and Beverages segment offers a full line of plant-based beverages and liquid and dry ingredients, as well as broths, teas, and nutritional drinks. Plant-based foods have had some of the strongest growth rates during the pandemic, but the category has been strong for several years across multiple categories.

The Fruit-Based Foods and Beverages segment offers quick frozen fruit for retail and bulk frozen fruit for food service, and custom fruit preparations for industrial use.  Over the past year, under new management, the company has seen a significant improvement in profitability. We had been most concerned about the Fruit-based division and its ability to source frozen strawberries this year.  SunOpta is not as dependent upon the strawberry business as it had been, with strawberries representing less than 5% of gross profit.

As seen by the DNKN announcement that it will carry oat milk, there are many growth legs in the plant-based milk category, and STKL is a pure-play on that growth.  Other key points:

  • Recently, Oatly raised $200M from Blackstone and Howard Schultz, Jay-Z, and Oprah, valuing it at $2B and plans to go public next year.
  • Oat milk sales increased by 270% YTD through mid-July.
  • America's milk drinking habits have been in steady decline, dropping from nearly 250 pounds per capita in 1975 to less than 150 pounds in 2018. The decline has caused two of the largest milk processors, Dean Foods and Borden Dairy, in the U.S. to file for bankruptcy in the past year.

SunOpta's leverage is high but manageable, and we expect better terms by year-end. 

We are adding SunOpta as a Best Idea Long. We see a greater than 30% upside to shares from here based on 10x our upside EBITDA forecast for 2021. 

© 2021 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.