Why Shares In Tate & Lyle PLC Plummeted

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

SugarWhat: Shares in Tate & Lyle (LSE: TATE) plunged by 15% to 669p during early trading this morning, following the release of a Q3 statement in which it cut its profit outlook, due to weak sales in developed markets and a drop in price of the artificial sweetener sucralose (which it sells under the brand-name Splenda).

So what: The company, which provides sweeteners and ingredients to the food and drinks industry, expects its annual profits to be in line with last year’s £329m. This is below analysts’ predictions by around £11m.

The price of sucralose is falling due to competition from cheaper rivals in China, where there is a mountain of unsold inventory. Tate & Lyle expects that sucralose prices will decline by about 15% in the current quarter, having previously only forecast a single digit decline.

Now what: In an attempt to defend market share, the company has renewed several customer contracts, some for multiple years, at lower prices. There’s nothing much the company can do, as sucralose profit streams are out of its control.

However, sucralose aside, the company expects to see profit growth in all categories across its specialty food ingredients business. This part of the group’s operations accounts for around 29% of sales and 65% of profit.

Following the profit warning analysts are speculating about a potential takeover bid. The Chinese firm Bright Food is currently on an acquisition trail, and Tate & Lyle’s crash in value could make it appealing. Bright Food bought Weetabix in 2012 and is believed to want to increase  its international presence.

Before today, analysts were expecting Tate & Lyle’s upcoming annual results to reveal earnings of 60p per share.

After today’s price movement the shares may therefore trade on a P/E of 11 and offer a possible income of around 4%.

The decision to ‘buy’ — based on those ratings, today’s results and the wider prospects of the food industry — is, of course, entirely yours to make.

While short-term price drops can result in a bargain, we believe every portfolio should feature companies with healthy balance sheets, dominant market positions and reliable cash flows.

Five such companies are identified in this exclusive wealth report.

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> Mark does not own shares in any company mentioned.