A new, leaner business model and shift to higher-margin products is expected to bring more healthy returns for investors in organic food company SunOpta Inc.
SunOpta shares have jumped by more than 65 per cent in Canada and 50 per cent in the United States over the past 12 months after a second straight year of record revenues and a realignment of its operations.
While some argue the stock is getting pricey at its current level around $11 (U.S.) per share, most analysts believe SunOpta will keep benefiting from the consumer's growing appetite for natural, organic and specialty foods.
"This is a trendy area," says Octagon Capital analyst Bob Gibson, who has a "buy" on the stock. "More consumers are flocking to a healthy lifestyle and that includes what you eat. Any company that serves that need … will benefit."
Brampton, Ont.-based SunOpta sources, processes and packages food from the raw material to product stage, such as soy milk, fruit juice and protein bars. About 88 per cent of its revenue is from the food business, while the rest is from its 66-per-cent stake in Opta Minerals Inc., which produces industrial minerals such as specialty sand.
SunOpta is looking to sell its interest in Opta Minerals to become a pure-play food company. Analysts see it as a good move given that the organic and natural foods market has grown by about 10 per cent each year over the past decade.
"Our strategy is to continue to build our non-genetically modified and organic foods platform, really leveraging the growth that is happening in the market," SunOpta chief executive Steve Bromley said in an interview.
SunOpta recently reorganized its operating divisions to help boost profit. That includes expanding its exposure to the packaging side, which is a higher margin business. For example, instead of just sourcing soybeans for its customers, the company will do more of the processing and packaging of them into products such as soy milk for sale at supermarkets.
About 75 per cent of SunOpta's revenue comes from business in North America, while the rest is from overseas, particularly Europe.
SunOpta's growth hasn't been without its share of problems. Despite reporting record revenue in 2013, the company's earnings were hurt by a voluntary product recall initiated by a customer that led to delays in product shipments at the end of last year, as well as plant expansion costs, lower commodity prices and money spent on reorganizing the company's operating units.
Still, analysts see more upside for investors in the future. Among 10 that cover the stock, eight recommend it as a "buy" and two say "hold" or equivalent, according to S&P Capital IQ.
Canaccord Genuity analyst Scott Van Winkle said SunOpta has lagged other publicly traded natural food companies such as Boulder Brands Inc. and Inventure Foods Inc., both of which are up nearly 90 per cent on the market over the past year.
"The reality is you're going to have very steady cash flow," with SunOpta, said Mr. Van Winkle, who has a "buy" on the stock and $13 price target.
SunOpta shares hit a 52-week high of $11.19 on the Nasdaq in late October, up from a low of $6.83 at this time last year. On the Toronto Stock Exchange, where the shares are more thinly traded, the stock hit a 52-week high of $12.30 (Canadian) earlier this month.
It's because the stock has been performing well recently that Scotia Capital analyst Christine Healy lowered her recommendation last week to "sector perform" from "sector outperform."
Even though she likes the company's long-term growth prospects, she suggested in a note that it was "time to take a breather."
Ms. Healy said SunOpta should trade where it is, at a discount to its peer group, in part because it doesn't have any well-known brands like other food names. SunOpta is mostly a private-label business.