SunOpta - Brief Breakdown

In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.

Company Description

SunOpta, Inc. (NASDAQ Ticker: STKL) is a multinational Canadian company, specializing in the sourcing, processing, packaging, and production of plant- and fruit-based food and beverage products. 

Quantitative Analysis

At the time of this writing (4/25/2021), SunOpta is trading at $13.31 with a 52-week range of 2.51 – 17.07 and a market cap of 1.4B. Although the PE ratio is relatively high – 17.97 – that increased earnings throughout and beyond 2021 will make this a solid long-term stock. According to their 2020 10-K Annual Report, plant-based products accounted for 53% of revenue and fruit-based products accounted for 47% of revenue, with both product lines posting revenue growth relative to 2019 (~15% growth for plant-based, ~7% growth for fruit-based). SunOpta, Inc. publishes all financial filings free of charge here.

Qualitative Analysis

SunOpta is on the cutting edge of a rapidly growing industry: organic food and beverage products. According to a recent report by the Organic Trade Association, the market share of organic food sales relative to total food sales has steadily increased from 3.4% in 2010 to 5.8% in 2019. In 2019, organic food sales amounted to ~$50B USD, up from ~$23B in 2010. Although they are well-positioned in a growing industry, SunOpta faces several challenges (see Potential Risks, below). As SunOpta competes against larger companies with better access to capital (e.g., General Mills), their ability to leverage R&D and provide great customer service will be crucial for success. Fortunately, they operate an innovation center in Minnesota staffed with experienced food scientists and technologists – hopefully they will find ways to compete with larger companies and maintain their position in this space.  

Bullish Thesis 

Here are three points to support the bullish thesis:

• Growing Organic Food Trend: Although there were clear U.S. (and worldwide) trends of increasing popularity of organic food products going into 2020, the COVID-19 pandemic injected uncertainty into the industry. It was unclear whether financial hardship would cause price-sensitivity in retail consumers (leading to decreased sales) or whether heightened health awareness due to the pandemic would lead to increased sales. The latter appears to have been the case. According to multiple reports, organic products saw a surge in 2020, with organic produce sales up 14% and all organic products (including non-food products) up 9.5%. SunOpta appears to have to have kept up with these trends, reporting a 9.4% growth in sales revenue during 2020 compared to 2019. Thus, it looks as though the organic food and beverage industry will continue to grow going forward. 

• Decreasing Price Difference: As the U.S. continues to print money to stimulate the economy in the face of pandemic-related lockdowns, there has been a major increase in the prices of commodities (due to various reasons). This causes some worry that the US will soon face a major inflationary period and costs of household items such as milk will surge. When inflation hits, the question will be whether consumers are willing to meet the increased cost of organic products (e.g., oat milk, soy milk, etc.) or if they will simply purchase non-organic. Based on the sales trends discussed above, it seems likely that consumers will continue to purchase organic and that SunOpta will continue to grow. 

• Supply Chain Optimization: In February 2021, SunOpta expanded its food production capacity by developing a production plant in Allentown, Pennsylvania and closed a frozen food production plant in Santa Maria, California. This is encouraging because it allows SunOpta to increase production as well as expand its footprint across the United States in the east coast. According to CEO Joe Ennen, “these initiatives are part of a multi-year supply chain optimization strategy to support our growth plans.” 

Bearish Thesis

Here are three points to support the bearish thesis:

• Concentrated client base: SunOpta reported that “in 2020, our ten largest customers accounted for approximately 67% of our consolidated revenues, approximately 69% of our Plant-Based Foods and Beverages segment revenues, and approximately 65% of our Fruit-Based Foods and Beverages segment.” The concentrated client base is worrisome because in a growing industry there is and will be increasing competition in the organic foods and plant-based foods market. Although the concentrated customer base seems to be ordering large quantities of SunOpta’s products, there is opportunity for a large corporation with more access to capital to poach clients. 

• Lack of proprietary product: Given the structure of the organic foods and plant-based industry, there is difficulty in creating a product that is cutting edge or new without another company replicating that product. Currently, SunOpta markets its products through co-manufacturing products with large retailers and by producing ingredients to go into products. Because of this, it is difficult to create brand loyalty and leaves SunOpta vulnerable.

• Exposure to regulations: As a producer of food and beverage products, SunOpta is subject to rules and regulations set forth by a number of government agencies, including the FDA, USDA, OSHA, and EPA.  The current U.S. administration may increase regulations placed on food and beverage companies, potentially slowing the short- and mid-term growth capacities. These regulations also leave SunOpta vulnerable for potential litigation and with their limited client base, could be detrimental if a SunOpta product is the source of a claim. 

Learn more about SunOpta, Inc. here.

Disclosure: The authors of this writing hold positions in companies mentioned in this article. Those companies are STKL. The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.