With a 1-Year Return of 116%, SunOpta, Inc. Shares Are on a Tear

Here’s why I believe SunOpta, Inc. (TSX:SOY)(NASDAQ:STKL) will finally capitalize on growth in the organic food industry.

Karen Thomas, MSc, CFA

Author Bio

Karen Thomas began her investment career in 1998 and spent more than a decade working as an equity analyst and portfolio manager at investment management firms, including a major mutual fund company and a major pension plan. After gaining extensive experience in the investment industry, she decided that individual investors deserved access to the same knowledge and insights to help them take greater control of their financial futures. After the birth of her second daughter, Karen left her investment management career to write for The Motley Fool, where she has been helping investors make sense of stocks and the stock market for more than 10 years. Her work focuses on identifying undervalued opportunities and helping investors take a long-term approach to building wealth. Outside of investing, Karen enjoys spending time with her family and staying active outdoors.

Education

Master of Science (MSc) in Finance
Bachelor of Commerce, major in Finance and minor in International Business
Chartered Financial Analyst (CFA) designation, earned in 2000

Areas of Expertise

Energy stocks, long-term investing, value investing, and contrarian investing.

Social Media Profiles

Favorite Investment Quote

"Be fearful when others are greedy, and greedy when others are fearful." — Warren Buffett

Published July 7, 2017 10:33 am EDT

A company I continue to keep my eye on is SunOpta, Inc. (TSX: SOY)(NASDAQ: STKL), as the organic food market has brought excitement back to the food industry. We have seen evidence of this in grocery stores, as more and more shelves are dedicated to organic foods.

A little over 10 years ago, organic food retail sales were $7 billion per year with a growth rate of 15-20% per year. In 2015, U.S. organic food sales were $43.3 billion, representing a growth rate of 11% — far stronger than the overall food market’s growth of 3%. Currently, organic food retail sales growth rates are still going strong. Organic food represents just 5% of the overall good market, and it is estimated that its growth will be between 10% and 14% per year for the next few years.

SunOpta’s latest quarter, the first quarter of 2017, was once again disappointing. Revenue declined 6.3% versus last year to $333 million. EBITDA margins of 5.7% were lower than last year’s margin of 6.3%.

So, why do I believe SunOpta will finally get its act together?

Well, first off, the senior management team has been revamped, and the hiring of the new CEO and other senior positions has been completed. The appointment of former chief operating officer of Diamond Foods, David Colo, as CEO may be just what SunOpta needs to move forward.

Second, the renewed focus on operational excellence and efficiencies and portfolio optimization have resulted in changes that are already yielding results. These changes have so far resulted in $7.5 million in annualized EBITDA benefits.

Importantly, while the company reported a net loss in the first quarter, it also reported cash flow from operations of $19.5 million compared to cash used of $17.9 million in the first quarter of 2016.

And lastly, the company beat consensus expectations in the first quarter of 2017, and while it only beat by $0.01 per share, this may be a turning point signaling that expectations have gotten low and that the stock is not pricing in any real optimism.

This makes sense, but now that we are seeing some positive signs, it increasingly looks like a good time to buy the shares for exposure to the organic foods trend that food retailers have been scrambling to get in on over the past few years.

And as we know, this has resulted in big struggles for premium grocer Whole Foods Market, Inc. (NASDAQ:WFM), which once pretty much had the market cornered. Loblaw Companies Ltd. (TSX: L), Wal-Mart Stores Inc. (NYSE:WMT), and Target Corporation (NYSE: TGT), to name a few, have significantly ramped up their organic food offerings.

In conclusion, the risk associated with SunOpta seems to be diminishing, and there are early signs that the company may finally be turning the corner, which would obviously bode well for the shares.