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Friday, October 18, 2013 - 08:30

This 'Secret' Small Cap Is 200% Undervalued

Friday, October 18, 2013 - 8:30am

It's not just food scarcity causing riots.

Last week, thousands of protestors in over 50 countries and 47 U.S. states took to the streets to rally against Monsanto (NYS: MON), a global leader in genetically modified seeds and food products. That violent reaction and growing resistance to genetically modified food is one of the biggest drivers in the incredible growth of the organic food industry.

While domestic food sales continue to grow at just 1% annually, organic food sales are on pace to reach $42 billion in 2014, a 31% increase from $29 billion in 2010. That same trend is unfolding across the world, with global organic food sales expected to top $100 billion by 2016. More than half of this demand is expected to come from the United States, with more than 40 million organic customers.

And today I am going to share one of my favorite stocks to cash in on the bullish trend. With the organics industry growing by leaps and bounds, this is one of the few small caps left in the space. That has lifted shares to a market-crushing 62% return in 2013. Take a look below.

SunOpta (Nasdaq: STKL) is an organic food and ingredients specialist with a market cap of just $540 million. On the consumer products side of its business, SunOpta owns a number of leading organic brands. That includes Sunrich Naturals, specializing in soy milk and sunflower beverages; Nature's Finest, a line of all-natural fruit juices; and Pure Nature, specializing in frozen organic fruits and vegetables. On the ingredients side of the business, the company sells organic raw materials to large commercial food manufacturers as well as organic ingredients to retail consumers at grocery stores.

SunOpta already boasts an impressive portfolio of organic products, ingredients and customers. But the company is moving aggressively to increase production capacities at its existing facilities in response to growing demand.

In late 2011 SunOpta began pursuing the high-margin and high-growth consumer products market with its "pouch" offerings, food pouches designed for durability and mobility. Its first two pouch lines at its Pennsylvania production facility have been important drivers of growth, fueling a 100% revenue gain in the division from last year in recent second-quarter results.

Building on that early success, SunOpta announced in August that it had completed the installation of two additional flexible, resealable pouch filling lines at its facility in Allentown, Pa. The $1.7 million investments gives the company strategic production on the East and West coasts, increases annual production by 40% to 140 million units and will enable SunOpta to continue expanding into higher-growth adult nutritional, value-added beverages and fortified foods.

In March, SunOpta completed the addition of a second processor at its plant in Modesto, Calif., that will increase production capacities by 50%.

SunOpta also recently finished an important expansion project in its aseptic beverage division with the installation of two new multi-serve fillers at its Modesto facility and a second production facility in Alexandria, Minn. These new fillers will enable SunOpta to introduce a new packaging format while also increasing product breadth with a platform to enter the organic dairy and nutritional beverages markets.

SunOpta isn't just increasing production at existing facilities. The company is also adding new processing facilities to drive production capacities. In October, SunOpta opened a specialty cocoa-processing facility in the Netherlands. The plant will process internationally sourced cocoa beans for the company's growing organic and cocoa business that had previously been outsourced to third parties.

But Sunopta isn't fueling revenue growth at the expense of financial stability and margin strength. With cash and equivalents of $13 million and long-term debt of just $46 million, the company has smartly left itself plenty of room to absorb volatility, take on more debt and increase operating leverage.

That strategic approach also shows up in margins, where management expects operating margins to expand above 6% from 4.6% in the first half of the year. That has analysts calling for 14% earnings growth in this year and 35% in 2014.

But in spite of that bullish outlook, shares look like a bargain compared to its peers. SunOpta's price-to-earnings growth (PEG) ratio of 0.65 is a sharp discount to the benchmark of 1 for value. It is also a big discount to industry peers Hain Celestial Group (Nasdaq: HAIN) and Annie's Inc. (Nasdaq: BNNY), both trading with PEG ratios of 2.

Risks to Consider: As a small cap with little analyst coverage, SunOpta doesn't offer the revenue and earnings transparency of a large-cap company. SunOpta's recent investments have increased its operating leverage, increasing its vulnerability to industry or economic weakness.

Action to Take --> SunOpta is the rare small-cap company in position to cash in on the surging organic foods industry. But in spite of that bullish outlook, STKL looks like a bargain compared with its peers. If SunOpta had the same PEG ratio as its peers, shares would jump to $30, a 200% increase from current levels.

P.S. If you think this is a bold call for SunOpta, you should check out our latest report, "The Hottest Investment Opportunities For 2014." Our previous predictions have given investors 89%... 92%... 293%... and even 310% gains in a year. To hear our latest, including how Apple's next breakthrough could turn the banking industry on its head, click here.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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