I’m digging deep to discover why this wildly popular FTSE 250 stalwart lost 14% of its share price last month. Tate & Lyle’s (LSE: TATE) a 100-year-old household name in kitchens and bakeries across the nation. Its golden syrup is renowned in the UK as the preferred option for cookies, tarts and puddings.
But since rebranding in 2023, the food and beverage manufacturer has faced some hurdles. A push to become more sustainable and appeal to health-conscious consumers is proving costly. It could pay off in the long run – but it won’t be an easy challenge.
Strong growth
Despite positive results in late May, Tate & Lyle shares fell that 14% in June. That brings its total share price losses to 17% since announcing those latest FY earnings.
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Despite a 2% drop in revenue, earnings per share (EPS) rose to 45p from 31p, beating analysts’ expectations by 8.8%. Profit margins and net income also grew by 7.3% and 41% respectively.
It also announced the completion of the sale of its remaining stake in Primient, a high fructose corn syrup brand. The move will help it focus fully on its more profitable speciality food and beverage division.
As is common with divestments of this sort, net proceeds have been tipped to fund a share buyback programme. That should be good news for investors, assuring a large influx of cash into the stock.
So why the drop?
With all the good news, investors would expect the shares to be soaring, not falling. So why the loss?
One reason may be the announcement that the company plans to buy CP Kelco for £1.5bn. The acquisition would form part of the shift in focus towards more sustainable and healthier food. Kelco sells pectin and similar nature-based gums and ingredients.
However, the acquisition is out of the ordinary for a company like Tate & Lyle. It’s a lot of money considering it only has a £2.4bn market-cap and already holds half a million in debt. Shareholders may fear dividends could be cut to help fund the acquisition.
Growth in the face of competition
Whatever the reason for the price drop, it means Tate & Lyle shares now appear to me to be bargains. Based on future cash flow estimates, the shares are undervalued by 42%. And with a price-to-earnings (P/E) ratio of 13.2, that’s well below the industry average of 18 and has lots of space to grow. Subsequently, there’s a good consensus among analysts that the share price will increase 40% in the coming 12 months.
But it’s not the only food producer in the UK. It faces stiff competition from other brands that are arguably already more sustainable. Premier Foods is a slightly smaller outfit that’s enjoyed 318% growth in the past five years. Known for Mr Kipling’s cakes and Oxo cubes, it already has a well-established ‘Enriching Life’ sustainability initiative in action since 2020.
Tate & Lyle will need to play a game of catch-up if it hopes to compete. The price looks cheap and the company has strong value in its established brands. But pivoting to appeal to a new generation of more health-conscious consumers will surely test the company’s reserves. Nonethless, I think it’s worth consideration.
